Bad news for seniors: Reverse mortgages just got significantly less attractive. Starting Sept. 30, new regulations will make it more difficult and more expensive to take advantage of the government's reverse-mortgage program.

What is a reverse mortgage?
The concept is fairly self-explanatory. With a mortgage, you make monthly payments to a lender. By contrast, with a reverse mortgage, you receive payments from a lender. The loan doesn't have to be repaid until you die, sell the house, or establish another primary residence.

Reverse mortgages are available to people 62 or older. The money can be used as supplemental retirement income, to pay for medical bills, for home improvements, or even to pay off your current mortgage. You are essentially converting part of your home equity into cash. As with any loan, you will pay interest on the amount borrowed.

New limitations
After two years with rates at historic lows, the Federal Housing Administration is attempting to mitigate insurance losses by imposing new restrictions on federally insured reverse mortgages. Here are the changes taking effect this fall:

  • First-year limit. A homeowner may now withdraw only up to 60% of the eligible sum during the first year. If, for example, a person can receive a reverse mortgage of $300,000, only $180,000 can be withdrawn in year one.
  • Smaller loans. Before the new rules, borrowers could take out as much as 61.9% of their home's value -- the limit depended on your age, your home value, and the prevailing interest rate. That same evaluation applies, but on average, borrowers will be able to take out about 15% less than they used to.
  • Fee changes. Previously, the upfront fee to take out a standard reverse mortgage was 2% of the property's value. The upfront fee to take out a saver reverse mortgage -- which limits you to a smaller amount you can borrow against your equity -- was 0.01%. Now, the upfront fee will be 0.5% across the board. Folks who take out more than 60% of their home's value will pay a 2.5% insurance premium.
  • Financial assessment. Lenders will now be required to analyze their borrowers' ability to keep up with tax and insurance payments before issuing a reverse mortgage. Lenders will look at income sources and credit history to determine the borrower's creditworthiness. If a lender decides you may not be able to make your payments, you will be required to set aside money.

The changes are intended to make people more careful about how they fund their retirement. The FHA wants borrowers to take out only what they need and what they can afford. The program strives to be less a safety net for financial emergencies and more a longer-term financial-planning tool. Of course, these changes present additional challenges to the already expensive process of retirement.

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