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Talking HECMs with the Uninitiated

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It’s a new year, but old HECM myths abound — even among those who ought to know better. One CFP who is also a Trust and Estate Practitioner warns seniors against reverse mortgages, sounding as though he’s swallowed every misconception in the book: “…the risks of reverse mortgages are so substantial and the stakes are so high, that for most people, choosing this path could lead to financial devastation. The risks run from large closing costs, the dangers of needing more money in the future, having family members kicked out of the house when they die, the loss of some governmental aid, and more.”

To correct such misinformation, here’s a basic refresher you can use during presentations, both with professionals in related fields (e.g., financial advisors and elder law attorneys), and with prospects and clients:

  1. Reverse mortgage, as the name implies, works like a traditional mortgage in reverse: instead of making a mortgage payment each month, the accrued equity in your home pays you. HECM proceeds are cash that a senior can use as they choose: to fix up their house, for health care, to take a trip, or for any other purpose for which they need additional funds.

reverse mortgage newsOne LO described about how he opens seminars and training sessions by asking senior attendees, “How many of you are making a mortgage payment or paying rent? Raise your hands. If I could give you back this money every month, would it help you? This is what I do through a reverse mortgage. Now let me explain how this actually works.” This introduction always gets their attention.

  1. A homeowner can’t “outlive” a reverse mortgage loan. As long as at least one borrower (that is, a person 62 years of age or older, whose name is on the title to the house) remains living on the property, pays the property taxes and insurance on time, and maintains the home in good condition, they can stay in the house for the rest of their life — even if the loan balance exceeds the value of the home!
  2. The reverse mortgage never has to be repaid by the borrower, unless and until the last property owner decides to move or sell, or vacates the home for more than one year. In practical terms, this means that if one spouse needs to move into an assisted living facility, for example, the reverse mortgage remains in effect as long as the other spouse a) is named on the title and is 62+ b) lives in the house c) maintains it and d) pays the property taxes on time.
  3. The updated HECM program protects seniors from liquidating all their assets at once by limiting first-year distributions. The smaller the dollar amount of proceeds, the lower the insurance premium.
  4. A reverse mortgage will not affect a borrower’s Social Security or Medicare benefits, because the funds received from a reverse mortgage are a loan (borrowed money), not taxable income.
  5. HECM for Purchase enables a senior to downsize from a larger family home into something smaller and less expensive in their later years. This type of reverse mortgage saves seniors substantial money, because the transaction involves just one set of closing costs, not two. Once seniors choose a HECM for Purchase of the new house, it must then become their primary residence.

Obviously, reverse mortgages are not a financial panacea. But for seniors who fit the profile, a reverse mortgage can be a welcome solution for a myriad of later life needs.

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8 Comments

  1. Amara, this is an excellent article that answers a lot of the myths about reverse mortgages. I will share this information with any senior who brings up any of these myths.

    I didn’t realize that you were so knowledgeable about reverse mortgages.

    I hope you keep up your great work for many years to come.

  2. Very nicely done. Thank you.

  3. Thank you, Owen and Jim. I’ve learned a lot from Shannon and from research over the years 🙂

  4. As a CPA, your first point is so untrue, it is offensive. Yet I am NOT saying that you, Ms. Rose, are saying anything different than most of my peers. The first point is such a common, mythical statement made by most of the industry that too many find it “acceptable” including most compliance officers. It is exactly that kind of statement that makes reverse mortgages sound too good to be true, because that particular statement is.

    How is it that the equity is paying the borrower? It is the lender and the servicer who are paying the borrower, not the equity in the home. No lender lends based on the equity in the home. Reverse mortgages are based on the total value of the home and the resulting “principal limit” plus any qualified cash the borrower is willing to bring to closing must be sufficient to pay all lending and other closing costs plus the existing liens against the home along with any required federal debt.

    But to crystallize this thought, let us consider a forward mortgage I closed over a decade ago. Out of the forward mortgage I received a lump sum of cash of $250,000 paid to me after paying off all lending and closing costs plus existing liens; yet the value of my home was lower than the current HECM lending limit. I spent that money anyway I wanted. Except for the option of making no payments, there was no material difference between that mortgage and a HECM fixed rate Standard but neither my wife nor I were required to be 62 years old. Was my mortgage nonrecourse? I live in California and as a real estate broker for over 20 years I can verify that our mortgage law is constructed so that mortgage lenders do not go to court to get deficiency judgments against borrowers, period; that process is simply too slow, costly, and burdensome to lenders. California provides a much easier and less costly legal process called the trustee’s right of sale but requires the note owner to forego any right to a deficiency judgment.

    Both are effectively nonrecourse mortgages with recorded liens. My mortgage was slightly better in four ways because the amount of the loan showing on the trust deed was the amount I borrowed not a multiple of that amount, there was no MIP, there was no age requirement, and there was no second trust deed filed against the property. Of course the income and credit requirements were higher along with the need to make monthly payments of interest and principal.

    One of the three initiatives of the Extreme Summit is to re-brand reverse mortgages. In my opinion the first point above simply continues the image that we disguise the fact that HECMs are nonrecourse mortgages with some unusual features which can be very beneficial to borrowers.

    So my challenge to readers is to describe how the forward mortgage I got over a decade ago is materially different from a fixed rate Standard HECM except as to the monthly payments, the amount shown on the trust deed, no MIP, income and credit requirements, minimum age requirements, and the fact the forward mortgage only had one lien. The fact is a reverse mortgage does not “work like a mortgage in reverse;” it is a nonrecourse mortgage with some great benefits for borrowers.

    I love the HECM program but not because it is a mortgage which works in reverse.

  5. Amara,

    Like others, I like the points except the fourth one. Borrowers can still take full or almost full draws at closing as long as they have sufficient mandatory obligations. Borrowers in the HECMs for Purchase program have full access to all proceed in the first year and take a lump sum of all monies at funding.

    But it is not true that “the smaller the dollar amount of proceeds, the lower the insurance premium.” It is not a scaled initial MIP. The rule is that if at funding, the amount of disbursements available to the borrower in the first year exceeds 60% of the initial Principal Limit, the initial MIP is 2.5% but otherwise, it is 0.5%. There is no break for disbursements below 60% or for those above 60%. The initial MIP is either 0.5% or 2.5% and nothing in between.

  6. Hi Cynic,

    I am aware that the MIP is not scaled, but since anyone working in this industry will be conversant with the HECM changes, for the purpose of the post I did not spell out the specific terms as you did in your comment.

  7. Thank you for this article. I find it much harder to deal with misinformation than actual pros and cons of the product.

  8. Hi Michael ~

    I appreciate your gratitude. My goal is always to provide reverse mortgage professionals with useful information (and inspiration!) to help you in your business and life.


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