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When Price is an Objection
Reverse mortgage professionals often encounter the objection that a reverse mortgage, especially the Home Equity Conversion Mortgage, is too expensive.
Certainly from a dollars and cents perspective, one could argue that point. After all, what other loan has an upfront FHA mortgage insurance premium equal to two percent of the home’s value up the HECM limit? The answer is none. So how does one overcome pricing objections?
First, pricing objections often have nothing to do with the loan’s cost. Frequently it’s because the homeowner either doesn’t understand what has been presented to them or doesn’t feel the potential benefits of the loan justify the upfront costs.
However, pricing objections lose their power (synonym) when the value of a reverse mortgage is properly understood. As a previous guest on this show, wealth advisor Ryan Ponsford said, “Price is a question in the absence of value”. So how does one build value in the mind of a potential borrower?
#1 Focus real-life examples
Give them real-life examples of retirement with and without a reverse mortgage. Make them feel the difference. Let it sink in. To do so you must not only know their outstanding mortgage balance but also their monthly payment. If you’re only fact-finding to see if they qualify for the loan you’re ignoring the other remarkable benefits a reverse mortgage may provide. For example, if their monthly mortgage payment is $1,750 a month you could say “In the first year of getting a reverse mortgage you would have increased your cash flow by $21,000. What could you do with that?”.#2 Don’t forget long-term care.
It’s the proverbial elephant in the room. No one likes to think about it but four out of five people 65 or older will require some sort of long-term care in their remaining years. Even more sobering, only one in ten (11%) Americans over 65 have a private long-term care policy. Those will few assets, such as those who are house-rich and cash-poor, cannot afford long-term care insurance premiums and are likely to depend on Medicaid. Those who have significant assets may have foregone a long-term care insurance policy. LawforSeniors.org notes, “Premiums for LTCI are relatively high. The average premium is $3,000 to $6,000 per year, depending on age, sex, health, the maximum daily benefit, the length of the benefit period and the length of the elimination period (or how long the policyholder must wait before benefits are paid)”. Furthermore, premiums are not fixed and increase over time. Many have found after ten years of dutifully paying premiums that they’re unable to pay premiums that have surged by 30% or more!
Without long-term care insurance retirees will have to tap into savings, retirement accounts, or other assets for their care. In such a circumstance what would the impacts be on their monthly income or the lifespan of their retirement or investment withdrawals? Homeowners with a significant mortgage balance could leverage their extra cash flow by eliminating their required mortgage payment and instead contribute to an account to be used for any potential long-term care expenses. Reverse mortgage borrowers with little or no previous mortgage balance could benefit from the growth of a HECM’s (Home Equity Conversion Mortgage’s) increasing line of credit or principal limit as another source of funds for care.
#3 Illustrate the Power of the HECM Line of Credit
You must illustrate the power of the HECM’s line of credit growth when hedging against long-term care risks. For example, a HECM line of credit of $200,000 with an assumed effective growth rate of 6% would increase to $212,000 at the end of the first year, $225,000 by the end of year two, and an astounding $358,000 by the end of year ten. Even better, if you account for the $210,000 in cash flow retained from not paying the last ten years of their $1,750 monthly mortgage payment combined with the available credit line the homeowner could have up to an additional $440,000 in ten years when long-term care is more likely needed.
Final Thoughts
In the final analysis, to build value you must have a basic understanding of the homeowner’s present financial situation, concerns, and long-term goals. If you connect each of these to the reverse mortgage you’ve built value that eclipses most price concerns. If you take anything away from today’s episode remember this– the value you deliver must exceed the cost of the reverse mortgage.Advertisement
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.
3 Comments
SHANNON THIS IS ONE OF THE BEST ARTICLES THAT YOU HAVE EVER WRITTEN.
KEEP UP YOUR GREAT WORK, YOU’RE HELPING THOUSANDS OF LOAN OFFICERS LIKE ME!!!
OWEN COYLE
REVERSE MORTGAGE WEST
Thanks a million, Owen! That’s very kind of you!
I take a different view. We sell perceived value using our credibility.
With tradable stocks and marketable bonds, I can go to the the Wall Street Journal website or to some other reputable publication’s website and obtain the current price of a security. I can also call trustworthy securities traders to find the price (or current value). Jewels and precious metals become a little more difficult to “value” because traders sell at slightly different prices and most of us cannot detect flaws or know how they affect value. To establish the value of a home, things become even more difficult; many times the problem is more difficult simply based on where the property is located.
Then there are tulips. In the early 1600’s, the value of tulips rose unbelievably in Western Europe. By the end of the 1600’s “Tulipmania” was gone.
BUT where do you go to establish the value of a HECM? Does anyone have an independent and reliable source? Is there a reliable market that establishes such values? Is there a publicly acclaimed and popular article or book that helps establish such value, as a number, not just a concept? Remember except for upfront costs immediately before closing, with a HECM the contingent asset equals the contingent debt, so intrinsically where is the numerical value of a HECM? Worse many borrowers incur upfront costs in the lower five figure range. Mathematically HECMs have a negative value and for good reason. Some borrowers (especially in the early years of their loans) say the upfront costs were a great investment but most heirs and many borrowers have a very different point of view of our product at and after termination.
Do HECMs intrinsically have value or are they like 1) diamonds after the release of the film, “Diamonds are a Girl’s Best Friend,” and 2) tulips in the early 1600s, whose values generally came from perception not scarcity?
Remember over 1.3 million HECMs have been originated per HUD and NRMLA. Based on multiple borrowers on many HECMs, almost 1.9 million seniors (living and deceased) are or have been HECM borrowers. The industry and HECM originators have an established reputation with most seniors.
We establish perceived value by overcoming misconceptions using what credibility we can muster and helping seniors to visualize how HECMs can and can potentially help them.