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The hidden cost of incomplete financial advice


There’s a cost to be exacted from homeowners who rely on incomplete financial advice

“You should only buy a house when you can put 20% down with a payment of no more than 25% of your take-home pay on a 15-year mortgage”. That was a Facebook post from Dave Ramsey in May of 2013 which echoes similar admonitions given in recent years. While few advocate buying a home with little or no money down, especially in a declining housing market, is there an opportunity cost for those who could have purchased a home nine or ten years ago with only a ten percent down payment? 

For example, a married couple in rural northern California was considering buying a four-bedroom two bath home which was listed for $285,000 in 2013. Having only enough money saved for a ten percent down payment they continued to rent following Ramsey’s advice to wait until they could make a 20% down payment. Was this sound advice.? Well, today that same home is valued at $420,000- a 47% increase. What Ramsey’s advice overlooks is the opportunity cost. This couple lost the opportunity to buy the home at a much lower price and accumulate approximately $135,000 in unrealized equity. That’s quite a cushion against any significant drop in home values. Ramsey is correct to point out that too low of a down payment can result in expensive private mortgage insurance or even worse becoming upside on your home should values fall. 

The lesson in this story is that there’s always a cost exacted for the advice we choose to follow.

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Editor in Chief:
As a prominent commentator and Editor in Chief at, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
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  1. Very smart analysis !

  2. Great Questions for potential borrowers here Shannon!

    • Thank you, Lori. Please let me know any feedback you may have from the field.

  3. After a HECM c oses, the expected rate will rarely come into play for the vast majority of HECM borrowers. It is the note rate that has the biggest impact on most borrowers. The margin is a fixed “interest “rate over the life of adjustable rate HECMs and has the largest impact on whether the note interest rate is reasonable compared to other mortgages since the index component (presently the one year CMT rate) generally adjusts in line with other interest indexes over time.

    Once the HECM L closes, the expected rate does not change for the related active adjustable rate HECM. Despite what the HECM industry says about it, the expected rate is not is a good indicator of what the actual AENIR (average effective note Interest rate) on that adjustable rate HECM will be. There is no empirical evidence supporting the idea that the expected rate provides a reasonable estimate of what the AENIR will be at termination. The expected rate we use is nothing more than a shot in the dark at the beginning of the HECM as to what the AENIR will be at termination. The expected rate is a five day (depending holidays) average of the 10 year CMT, not the rate of the 10 year CMT on a particular day.

    Have you ever wondered why the HECM book of business for fiscal 2010 was estimated to be a negative $798 million during the budget process by the Obama OMB (Office of Management and Budget)? One key reason was that OMB did not believe that the expected rates generated during fiscal 2010 were representative of what the related AENIRs would be (or what the Home Price Appreciation would be over the lives of those HECMs).. One Obama OMB official stated in a heated debate over the “pessimistic” results OMB was predicting was that OMB did not trust the interest rates FHA had used in predicting the financial outcome for the HECMs endorsed in the fiscal 2010 budget process.

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