In a surprise move, the government is changing the reverse mortgage rules again. And the changes, which affect the cost of insurance and borrowing limits, are a mixed bag for borrowers.

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Upfront mortgage insurance premiums will be a flat 2% for every loan, a change that means some applicants will pay more, while others will save. If you qualify to take up to 60% of the eligible loan amount in the first year with the remainder available the following year, your upfront cost will rise one and a half percentage points from the previous 0.5%. For those who qualify to take more than 60% in the first year, generally because of an outstanding mortgage that must be paid off, the upfront cost drops by half a point, from 2.5%.

Ongoing insurance costs will drop for all borrowers, with the annual premium falling from 1.25% to 0.5%. "Over time, that could have a significant impact," says Peter Bell, president of the National Reverse Mortgage Lenders Association. For every $100,000 in loan balance, you'll save $750 a year. The lower ongoing cost may offset much or all of the higher upfront cost.

The calculation for maximum loan proceeds is also being tweaked. The adjustments will hit most new borrowers, cutting potential proceeds by 10% to 12%. The new rules "reduced the percentage of home value that's available to borrowers at most ages and at most interest rates," says Bell. The older you are and the lower the interest rate, the more proceeds you get, but most everyone will now qualify for less than before.

These changes, which go into effect on October 2, are the latest in the government's effort to shore up the federal Home Equity Conversion Mortgage program and ease concerns about the health of its insurance fund. Other recent efforts to keep the program alive have included instituting a financial assessment for applicants and limiting the drawdown of loan proceeds in the first year

The government has a vested interest because most reverse mortgages are federally backed HECMs. Homeowners age 62 or older can tap home equity in the form of a lump sum, line of credit or monthly draws. The loan does not have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months, and borrowers never owe more than the home's market value. With a HECM, the government covers any gap if the house sells for less than the loan's balance.

Impact on Borrowers

The changes are "raising costs across the board, while simultaneously lowering borrowing power," says Cliff Auerswald, president of All Reverse Mortgage, in Orange, Cal., and the combination could push reverse mortgages out of reach for some seniors. One recent applicant would have $12,000 left over after his forward mortgage was paid off under the old rules, but under the new rules that same applicant will be $70,000 short, he says, and wouldn't be able to complete the loan.

It's not only applicants on the edge who may no longer be able to turn to reverse mortgages. The rule changes undercut the "standby strategy," too, says Auerswald. That strategy calls for setting up a reverse mortgage line of credit as a reserve that a retiree can tap as needed. The falling costs of reverse mortgages heightened the strategy's appeal in recent years. "It didn't cost much to set up that reserve," says Auerswald.

Now the upfront costs will be higher. On a $600,000 house, the upfront mortgage insurance premium will now be $12,000, compared with just $3,000 under the old rules. (In addition to the upfront insurance premium, borrowers owe closing costs that typically run about $2,500. Some lenders may charge an origination fee of up to $6,000.)

While the lower ongoing insurance cost is helpful, the savings may be muted because you don't pay the annual premium on the untapped line of credit, only on any balance you've racked up. (For more on how that strategy works, read Using Home Wealth as Emergency Fund.)

There's a quickly closing window to take advantage of the old rules before the new ones go into effect in October. It will be tough for anyone just starting the process to beat the deadline, though. Before you can apply for a reverse mortgage, you must set up and complete a counseling session, which is required by the government. Only then can you apply for a reverse mortgage. "The window is crazy short," says Auerswald.

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