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New Rule Helps Seniors Save on Mortgage Fees By Kathy Chu A new federal rule will
reduce costs for seniors refinancing so-called reverse mortgages on their
homes. The rule adds another layer
of protection for seniors refinancing these federally insured loans. The
move comes as reverse mortgages -- which have been criticized for steep
fees and their complexity -- are increasingly being used by seniors to
fund retirement needs, medical care and home payments. The regulation, issued last
month by the U.S. Department of Housing and Urban Development, is expected
to save elderly homeowners thousands of dollars by trimming costly upfront
insurance premiums paid for reverse-mortgage refinancings. "This is an important
financial incentive to allow seniors to access a greater amount of home
equity at a reduced cost," said Sean Cassidy, the deputy federal
housing commissioner for HUD. Reverse mortgages differ
from traditional mortgages because instead of making monthly payments,
homeowners who are at least 62 years old can borrow from the equity they
have built up in their home. The amount that can be borrowed -- through a
lump sum, monthly payments, or a line of credit -- depends on interest
rates, the homeowner's age, available equity and the home's value. Generally, the more
valuable your home is, the older you are and the lower the interest rate,
the more you can borrow. And right now, low interest rates, coupled with
rising home values and an increasing number of Americans entering
retirement, are contributing to the popularity of reverse mortgages. In the latest fiscal year
ended Sept. 30, the number of federally insured reverse mortgages issued
climbed 39%, according to the National Reverse Mortgage Lenders
Association, a trade group in Washington. Refinancings are also up because
seniors can tap into more equity. Jeanette Brooks, 79 years
old, first took out a reverse mortgage six years ago to pay property
taxes, bills and to buy a car. But this past January, as the value of her
home rose, she refinanced her reverse mortgage to access an additional
$60,000 in funds, for things such as dental work and a cruise to Bermuda. "The first one I got
mainly to pay off my bills, but the second one, I got mainly for
myself," said Ms. Brooks, who lives in Lanham, Md. Reverse-mortgage lenders
are hoping for an even greater surge in business as a result of the
regulation. Already, "we've seen a 30% increase in the number of
inquiries from seniors who want refinancings since this was
announced," said Jim Mahoney, chief executive of Financial Freedom,
an Irvine, Calif., Lehman Brothers Holdings Inc. subsidiary that
originates and services reverse mortgages. EverBank, a Jacksonville,
Fla., reverse-mortgage lender, expects a "modest increase" of
about 5% to 10% in refinancing of these loans once this regulation takes
effect, according to Patrick McEnerney, the company's executive vice
president. The new rule basically
eliminates what can be a double penalty on the so-called upfront insurance
premium that homeowners must pay when they refinance federally insured
reverse mortgages. This payment goes to the Federal Housing
Administration, a subsidiary of HUD, to protect lenders from loss and
ensure that homeowners don't owe more than the value of the house when it
is eventually sold. Previously, homeowners had
to pay the lesser of 2% of the home's value or 2% of a federal limit for
home values in the area for this type of reverse mortgage. When they
refinanced, they may have had to shell out another 2% on the updated, and
possibly higher, appraised value of the home. Under the new regulation,
the premium that homeowners pay can't be more than 2% of the difference
between the maximum claim amount on the original reverse mortgage and the
refinanced one. The savings can be
significant. For example, a senior who is refinancing a reverse mortgage
on a home initially valued at $100,000 but that is now valued at $200,000
may only pay a $2,000 insurance premium instead of the $4,000 that may
have been tacked on before. Of course, appraisal, monthly servicing and
fees are on top of the insurance premium. Nevertheless, "by
giving people credit for the [insurance] amount paid the first time, it
becomes more worth their while to do a refinancing," said Peter Bell,
president of the National Reverse Mortgage Lenders Association. In general, total fees for
reverse mortgages -- about 90% of which are insured by the Federal Housing
Administration -- can run to as much as 9% of the home's value, according
to Mr. Bell. Software systems that lenders rely upon to calculate reverse-mortgage costs have to be modified, according to Mr. Bell, and this could delay implementation by 30 to 60 days. Also, the rule applies only to refinancing applications submitted on April 26 or after, not existing applications that are finalized after this time, according to Mr. Cassidy of HUD. Apply Online
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