NEW Principal Limits Demystified

Last week we saw two watershed events for the federally-insured reverse mortgage program. Revised Principal Limit Factor tables and the inclusion of younger non-borrowing spouses under the age of 62. The pace of changes to the HECM program has been swift with FHA’s new authority to make substantial changes via Mortgagee Letter rather than the lengthly rule-making process.

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BREAKING: New PLF Tables Published

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Reverse Mortgage Lending Ratios
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When HUD released their expected changes to the Home Equity Conversion Mortgage Program (Mortgage Letter 2013-27), or the federally insured reverse mortgage many asked “Where are the new lending ratios?”. Well the new Principal Limit Factors are here (download PLF Factor Table here).

Important Points to Ponder:

  • Many expected (myself included) that HUD would split the difference in lending ratios between the Standard and Saver. That is not the case. HUD has basically given us a Saver with a graduated upfront Mortgage Insurance Premium based on the percentage of available funds used in the first year. Basically the new Stand-Alone HECM gives 15% less than the standard across all ages and .6% – 8.2% than the Saver based on age.
  • **High Interest Rates spell trouble above 10%. This has been the case since the October 2010 PLF table update but is a little known fact. HUD says that it is not financially feasible to offer HECMs if interest rates reached 10% or higher and reiterates this point in their latest PLF Factor Tables.
  • The product is still viable for those working with financial professionals. While the Saver will cease, it’s introduction opened up the door of using the HECM as a legitimate planning tool. Despite higher upfront MIP charged for those only seeking a line of credit the costs are still negligible and the lending ratios still support a robust line of credit.