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HUD Issues New Rule to Reduce Senior's Out-of-Pocket Costs to Refinance Reverse Mortgages

Interim Rule Implements Other Consumer Protections

March 29, 2004 – Seniors wishing to take advantage of today's low interest rates by refinancing a reverse mortgage will pay less fees, and receive other consumer protections, according to a new regulation issued by the U.S. Department of Housing and Urban Development, the National Reverse Mortgage Lenders Association announced today.

The Interim Rule issued by HUD reduces the upfront mortgage insurance premium (MIP) charged to seniors who refinance a federally insured reverse mortgage, commonly called the Home Equity Conversion Mortgage (HECM). The HECM is insured by the Federal Housing Administration (FHA), a part of HUD.

Currently, a senior who refinances their reverse mortgage is charged a MIP equal to 2% of the appraised home value, plus an annual premium thereafter equal to 0.5 percent of the loan balance.

The new Rule states that the MIP will be paid on the difference between the home value at the time the original HECM was made and the newly appraised home value at the time of refinancing. For example, if the original home value is $200,000 and the newly appraised home value is $275,000, then the 2% MIP will be paid on $75,000, instead of $275,000.

"Seniors are looking at a huge cost savings if they choose to refinance their HECM," said Peter Bell, President of NRMLA.

The Interim Rule takes effect April 26, 2004. An Interim Rule means that the provisions take effect on the effective date, but HUD is accepting additional comments and will publish a final rule at a later date. Final comments are due May 24, 2004.

The Rule also waives the mandatory counseling requirement in a refinancing, but only if the loan amount that the borrower is eligible to receive exceeds five times the total cost of the refinancing. For example, if fees and costs equal $10,000 then additional cash should be at least $50,000 to waive additional counseling.

A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home, without having to sell their home, give up title, or take on a new monthly mortgage payment. The loan proceeds can be used for any purpose, and taken out as a lump sum payment, fixed monthly payment, line of credit (except in Texas), or a combination. The loan amount depends on the borrower’s age, current interest rates, and the value and location of their home. A reverse mortgage isn’t repaid until the borrower moves out of the home permanently, and the repayment amount can’t exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or borrower’s heirs/estate.

A senior’s home doesn’t have to be owned free and clear to qualify for a reverse mortgage.

NRMLA distributes a free information booklet on reverse mortgages, called Just the FAQs: Answers to Common Questions About Reverse Mortgages. Consumers can order it by telephone (1-866-264-4466, toll-free) or at NRMLA’s Web site. The Web site has extensive information on reverse mortgages, a state-by-state list of lenders, and a reverse mortgage calculator.

NRMLA is a nonprofit trade association, based in Washington, DC, whose members make and service reverse mortgages throughout the U.S. and Canada. Members sign a Code of Conduct pledging to abide by guidelines that assure fair, ethical, and respectful practices in offering and making reverse mortgages to seniors.


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