The Department of Housing and Urban Development (HUD) announced it’s reducing the principal limits for the HECM standard product on Tuesday, but an unexpected change provides additional proceeds to many younger borrowers.

Starting October 4, 2010, HUD is also lowering the effective interest rate floor from 5.50 to 5.00 percent.  Because interest rates are so low, many reverse mortgage borrowers will receive more money than previously available, despite the principal limit reductions.

According to IBIS Software, a 70-year old borrower with an expected interest rate of 5.06% or less will receive $10,750 more on a $250,000 home compared to the previous principal limit factors.

”The new products will boost economic power for America’s seniors by making more equity value available through the HECM program,” said Jeff Lewis, Chairman of Generation Mortgage.  ”HUD’s announcement is welcome news in an economy where both capital and credit are scarce and for a market where seniors are looking for options that maximize their equity.”

HUD also officially announced the HECM Saver, which provides less money to borrowers but reduces the upfront costs of the loan.

The number of reverse mortgage applications has continued to rise over the last few months and this will only help said Lewis. “We will continue to see increases, this is all very healthy for the industry,” he said.

IBIS Software created a way for lenders to run scenarios and compare the old product vs the new here.

To view the new principal limit factors, see here.