Two Flawed Reverse Mortgage Explanations
There’s no second chance to make a great first impression.
That’s why our terminology must be concise and accurate. Even seasoned reverse mortgage professionals will want to look at the two most common inaccuracies that continue to this day.
Are you using any of the following phrases with potential borrowers or financial advisors?
“A reverse mortgage lends you a percentage of your home equity.”
If you’ve used this phrase in front of a real estate professional, a traditional mortgage broker, or a financial advisor it’s time for a time-out.
Why? Let’s do the math. For example, Mrs. Jones is 72 years old and has $150,000 equity in her $415,000 home. Using the Principal Limit Factor (PLF) tables that determine the gross available HECM proceeds at a 6.5% expected rate we get a factor of .393
If HECM proceeds are based on a percentage of the home’s equity Mrs. Jones would only qualify for $58,950 in proceeds before fees and payoffs. Thankfully, HECMs are based on the percentage of one’s home value (up to the maximum HECM Limit). Lending based on her appraised value Mrs. Jones’ gross loan proceeds would total $163,095, over $104,145 more than if HECM proceeds were based on her equity.
No wonder some financial professionals who were told reverse mortgages loan homeowners money based on their home equity believe there’s an insufficient cash benefit to justify the expense.
Replace equity with appraised value and you can smile knowing you’ve got it right.
“A reverse mortgage eliminates your debt.”
While a reverse mortgage may eliminate an existing mortgage payment, the debt remains. It’s just been simply refinanced from a loan with required monthly principal and interest payments to a loan that doesn’t.
If a reverse mortgage truly eliminated debt borrowers would find themselves with a sizeable tax bill for the supposed ‘free money’ they received. That’s why reverse mortgages do not give homeowners a stream of monthly income because all income is taxable. They simply may provide access to loan proceeds after any existing liens on the home are paid off.
But what about eliminating credit card, auto, or personal loan debt? The reverse mortgage doesn’t do that either. It’s transforming the debt from one kind to another. You may want to eliminate the word ‘eliminate’ when referencing existing debts that may be paid during a reverse mortgage transaction.
Using precise and accurate language helps ensure you’re not undermining your credibility with financial advisors, realtors, and homeowners and avoiding costly mistakes that could cost you or your lender a sizeable penalty.
What other misstatements do you hear from other reverse mortgage professionals? Share what you’ve encountered in the comment section below.
Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, 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.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
6 Comments
You are so right about the need for precise language when describing the features and benefits of a HECM.
Thank you, John.
Here, here, John
Our use of the so called “mother” tongue, American English, too many times is flawed. Shannon brings that out well and you do a great job in reinforcing that.
Shannon,
I explain that a HECM is a payment optional mortgage. Most folks choose not to pay the principal and interest payment… but you are still responsible to pay your HOI and property taxes..
making any payments will increase the LOC if there is one as well, so there can be a benefit for those folks that are currently in a position to do so
John- well said!
John,
Like a lot of us you use the word payment loosely. The clause that “begins with “making any payment will increase the LOC..” comes immediately after “pay your HOI and property taxes.” Grammatically that means paying HOA and property taxes will result in a higher HECM line of credit. Perhaps a better wording would be to say: “making any payment of MIP, servicing fees (if applicable), interest, or principal will increase the HECM line of credit….” Of course, HUD calls repayments, prepayments.
I do not understand what you mean when you say: “so there can be a benefit for those folks that are currently in a position to do so.” Specifically what do you mean by “…currently in a position to do so?”
In your list of property charges you leave out applicable homeowner insurance. This is a big problem with any mortgage. When a consumer has no mortgage, generally not paying homeowners’ insurance has no consequence other than loss of peace of mind. Let a mortgage borrower be late with such an insurance premium and the threat of default and ultimate foreclosure ARE very real.
While the idea of an optional payment mortgage may sell HECMs, leaving out that it is a nonrecourse mortgage is odd. It is far more significant issue to those Traditional HECM borrowers who do not live in trust deed states than optional payment rights (or at least it should be).
Not all HECM payments can be applied to a HECM line of credit. If the HECM UPB is paid in full there is no line of credit; the HECM automatically closes. Also fixed rate HECMs do not have lines of credit. Finally, the amount CANNOT result in the HECM UPB going negative. I have heard several ask the question that “if the line of credit is paying at a rate than the interest paid at bank on savings why not just put all our savings into the HECM?” I am sure you know that cannot be done but your statement ignores what you know.