Happy New Year! The year 2020 was one of the more tumultuous years in recent memory, was it not? We sincerely hope that the new year finds you well!
In life, things are always changing – and it’s no different in the reverse mortgage world. The new year brings some significant changes to the HECM reverse mortgage.
A new higher HECM lending limit for 2021
FHA periodically revises the lending limit to reflect real estate market conditions. The lending limit is effectively the maximum appraised value used for the calculation of proceeds.
For case numbers issued on or after January 1, 2021, the HECM lending limit will be $822,375. This is a substantial increase from last year’s lending limit of $765,600. This means more proceeds for homeowners with homes valued more than the old lending limit.
One downside with the higher lending limit is that it also comes with a higher IMIP premium, which is calculated based on the lending limit. The maximum IMIP premium will rise from $15,312 to $16,448.
We’ve updated our reverse mortgage calculators to reflect the lending limit change.
A brand new shiny index for HECMs
A bigger change for the HECM is also in the works. The reverse mortgage industry is transitioning the index used to calculate proceeds and interest from the LIBOR (which is being phased out across financial markets) to the CMT, or Constant Maturity Treasury index.
The implementation of the CMT probably won’t change a whole lot for HECM borrowers, but it’s a significant and difficult transition for the industry. Originally, the CMT transition was to officially take effect on January 1, 2021, but the official date has been pushed back to March 1, 2021.
The transition deadline is being driven primarily by Ginnie Mae, the most significant buyer of HECM loans from lenders and thus a big influence on the HECM secondary market.
The CMT index replaces the LIBOR index, which has been used for a number of years to calculate the expected interest rate (which is used to calculate proceeds) and the initial interest rate (the actual note rate for variable-rate HECMs). The CMT is comparable to the LIBOR in a lot of ways (which is why it was chosen), so there shouldn’t be a lot of changes for existing HECM borrowers.
New HECM borrowers may see slightly more proceeds under the CMT than they would have under the LIBOR index. Don’t quote me on that, however! Plenty of dust still needs to settle on that.
More proceeds for high home value borrowers
If you’re in a high cost real estate market and you’ve been sitting on the fence about a HECM, now might a good time to jump in and get it done. Interest rates are still at record lows (which means more proceeds than in past years). The low rates and the new higher lending limit means you can now tap into significantly more equity than would have been available in the past.