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Decision Tree: One Home, So Many Options

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Decisions With A Reverse Mortgage

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Your prospect has done the research and decided a reverse mortgage makes sense for them; they’d prefer to remain in the house that holds a lifetime of memories rather than go through the upheaval of moving to a retirement community where they won’t know anyone. Now it’s just a simple matter of applying for the loan, right?

Reverse Mortgage Loan OptionsMany seniors don’t realize that when choosing a reverse mortgage, they’re at the start of a decision tree resembling a Chinese menu of options — though with a much longer lasting outcome!

Here’s a simple, 4-step guide to walk your clients through the reverse mortgage decision-making process. It’s akin to good journalism: the story must include who, what, how, when and where. The “who” is apparent: seniors that wish to age in place in the home they love. Now to the when, what, how and where:

1) When: Age Has Its Rewards

Reverse mortgage is one arena where being older is an asset. While 62 is the minimum age to qualify, the older you are, the more money you can receive from a reverse mortgage loan.

On the other hand: if you need the money in order to meet immediate needs, such as bills or health expenses, it may be wiser to forgo the extra funds and apply now.

Finally, consider interest rates: the higher the rate, the more interest will be added to the loan.

2) What Now? Tried-And-True or Save With New

Next comes the choice of what type of HECM product will serve your client best: the HECM Standard, which provides more money with higher fees, or the newer HECM Saver, which, as its name implies, is a lower-cost version of the HECM Standard that provides less upfront money in exchange for minimal FHA insurance.

As noted when a senior is deciding whether to delay the reverse decision or forfeit the additional funds in favor of immediate proceeds, the choice of HECM depends on the homeowner’s financial needs. The amount of money someone receives with a Standard HECM is based on a HUD algorithm that factors in the applicant’s age, current appraised value of the home and interest rates. Fees can include an origination fee, an upfront mortgage insurance premium (MIP), an appraisal fee, traditional closing costs and a monthly servicing fee. Despite these hefty fees, people who need the most money possible now would do best with the Standard HECM.

The savings in a HECM Saver come from a much lower MIP — but the trade-off is 10-18 percent less money overall. The Saver appeals to borrowers who don’t need as much money, and would prefer to save on fees.

3) How It Gets Interest-ing: Fixed or Adjustable Rate?

Now that they know the “who,” “when” and “what” of reverse mortgage, a borrower must decide on the “how”: do they wish to receive the loan as a lump sum, as a monthly payment, or as an equity line of credit? They can mix it up, too, which makes the interest rate even more … interesting.

A borrower can take a lump sum payment with either a fixed or an adjustable interest rate, while monthly payments and equity lines of credit, by their very nature, are only available with an adjustable interest rate. However, the borrower may combine distribution types (a partial lump payout with an equity line, for example), which would mean the interest would be subject to the adjustable rate. Retirees who opt to do this are former math professors and actuaries.

Kidding aside, the decision of a fixed or adjustable interest rate comes down to how the borrower intends to use the money. If they need to pay off a large existing mortgage with the reverse loan, which will leave perhaps $10-30K or less available after paying off the mortgage and loan fees, then a fixed rate may make sense, because it requires use of ALL available money (lump sum). Those who have a very small or no mortgage to pay off, on the other hand, and who don’t require all the money upfront, would be better served by an adjustable rate and monthly (tenure) payments. In addition, with the adjustable rate the unused portion of the line of credit continues to grow each month.

4) Where: It’s Just Like Starting Over — But Not Really

Finally, savvy seniors who want to live in their own home — though not the one they currently own — may opt for a HECM for Purchase, a bit of real estate legerdemain. The older homeowner sells their present home and obtains a HECM for Purchase loan in order to buy the new house, thus purchasing it outright and leaving them with zero monthly mortgage payments.

The HECM for Purchase option may suit seniors who, rather than modify an existing home, choose to move to one that is already suited to their changing needs, whether in terms of greater accessibility, lower maintenance costs, more desirable location, or some combination of factors.

Once all the decisions have been made and you and your client have crafted a reverse mortgage “news story” to be proud of, you might suggest going out for Chinese food; after mastering this decision-tree, ordering will be a slam-dunk.

 

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3 Comments

  1. “The older you are the more you get”. Approximately $1,200 to 1,500 more for each year of age so if you qualified for a $100,000 now you would get 101,500 by waiting one more year. In the meantime if interest rates moved up a half point during the year you might get $90,000 to 95,000 instead of $100,000 and also be locking in a higher margin or fixed rate of interest for the life of the loan. The regulatory bureaucracy might act to reduce the principal limit factors again thereby resulting in another 5 percent reduction in available loan proceeds. So, wait a year or more at considerable peril if you ask me. Of course, there are also “quality of life” issues that need to be taken into consideration. How many more “good” years does a person have?
    Also, since so many consumers have a mortgage on their property now, what does the monthly payment burden look like over the next 12 months and how much of that is interest that they don’t need for tax deduction purposes?
    I guess nothing is quite so simple these days and “decision trees” sometimes make the forest harder to see.

  2. I am somewhat lost in the presentation.

    First, this decision tree assumes a house rich but cash poor senior homeowner situation. For example, it states (the following two sentences in quotation marks plus the entire next paragraph): “Reverse mortgage is one arena where being older is an asset. While 62 is the minimum age to qualify, the older you are, the more money you can receive from a reverse mortgage loan.

    On the other hand: if you need the money in order to meet immediate needs, such as bills or health expenses, it may be wiser to forgo the extra funds and apply now.”

    The article totally ignores the recommendations for the more affluent from the financial planning community itself on getting Savers early in retirement to maximize cash inflow throughout retirement or even the very simple idea of having a Saver as a standby cash reserve rather having actual cash reserves invested in low earning but very liquid assets.

    Second this quotation is just plain wrong: “However, the borrower may combine distribution types (a partial lump payout with an equity line, for example), which would mean the interest would be subject to both fixed and adjustable rates.” But presently there is no hybrid product which has both a fixed and adjustable rate component.

    Maybe others did not have the same reaction but this article has need for significant revisions. The intent was good but the content needs help.

    • I agree we must not ignore the product’s potential fit for the more affluent. That said Amara’s article was not intending to examine the Saver but the reverse mortgage’s overall fit in the context of staying in the home, fixed or adjustable and other factors. While basic concepts for some these concerns are often overlooked by many in the process. Yes age slightly increases the available principal limit but the real challenge for many potential borrowers and loan officers is walking through the process of what product best fits their present life situation.


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