New rules that are in the process of being implemented for reverse mortgages may prompt more lenders to work with financial planners and their clients, says Michael Kitces, director of research for the Pinnacle Advisory Group in Columbia, Md.
At the same time, financial advisors whose clients want to use reverse mortgages may find the new, more restrictive rules have little impact on their plans. The new rules by the U.S. Department of Housing and Urban Development will mean that reverse mortgages will be used as a proactive planning tool instead of as a last resort money source, says Kitces.
Kitces, a noted author, speaker and educator on financial issues, will address the National Reverse Mortgage Lender’s Association at the organization’s annual meeting next week in New Orleans. It will be a question and answer format in which Kitces will answer lenders’ questions.
Reverse mortgages allow homeowners 62 years of age and older to take out a loan on the equity in their homes to receive regular, tax-free payments. Some of the money can also be taken in a lump sum at the beginning of the loan or the money can be held as a line of credit to be used if necessary.
Kitces has written extensively on reverse mortgages and the rule changes that took effect in September and others that will start in January. The changes include consolidating the Saver and Standard loans into a single entity. Saver loans had been developed to provide less expensive costs for the Mortgage Insurance Premium that had to be paid at closing.
The new Mortgage Insurance Premium will be higher than the Saver costs and less expensive than the Standard costs. It is now set at 0.50 percent of the assessed value of the property.
The new rules limit the amount of money that can be obtained during the first year of the reverse mortgage to 60 percent of the loan principal.
Starting in January borrowers will be required to undergo a financial assessment to determine if they are reasonably capable of paying the property taxes and homeowners insurance, which are required under the reverse mortgage agreement.
The new higher fees may make reverse mortgages less attractive as a last resort money source. But that is not what the reverse mortgages were originally designed for anyway, Kitces says. They were designed to be used as proactive planning tools to provide money during retirement.
“Given that financial planners tend to work with somewhat more affluent clients anyway, and engage in a proactive planning process that addresses the client’s ability to fund their retirement goals, it is likely that the new financial assessment rules will have little impact on reverse mortgage eligibility for most financial planning clients,” Kitces says.