The following is not for consumers, homeowners, or borrowers. It is intended for reverse mortgage professionals and is not intended to provide legal or financial advice.
Remember the infamous pick-a-pay loan? Perhaps we should have been calling them ‘pick-a-foreclosure’ loans. Back in the unbridled craziness that was the pre-2008 housing bubble homeowners could choose to pay a fully-amortized payment, interest-only, or negative amortization (underpay). A novel idea that was doomed to fail. Why? Those who paid less than an amortized payment saw a reset trigger when their loan reached 110% to 125% of the original balance. The siren song of optional mortgage payments is no less enticing today than it was 12 short years ago. Thankfully these poisonous exotic loans are extinct, however, one pick-a-payment loan remains hidden in the unnoticed corners of mortgage lending- the reverse mortgage.
It doesn’t take much reflection to recognize the vast majority of reverse mortgage borrowers took the loan to eliminate their required monthly principal & interest payments. However, that trend is slowly evolving with more seeking to have access to large sums of cash should they need it, and others choosing to make periodic payments. No one wants to admit they’re beside themself trying to figure how to make ends meet in retirement, but they’re more willing to act to avoid that dreaded fate.
In the post-COVID 19 world the choice-driven consumer will play an increasingly important role, particularly for the mass-affluent who are not driven by the pangs of need or desperation. People love to have choices- even if they will likely never exercise them. A quick visit to your nearest casino buffet serves as a tangible and tasty reminder.
So Adam and Rebecca just took a reverse mortgage last month which did in fact eliminate their former mortgage payments. Being fiscally conservative they decide they’ll pay what they used to on their former loan 9 months of the year. The other three remaining months they take a ‘payment vacation’. There’s no paperwork required, no loan modification agreement that must be approved by their bank, or begging of any sort. They’re in control. The skipped payments they use to partially fund their annual family vacation helping their children and grandchildren who otherwise would be unable to attend.
Patti decides upon the old pick-a-pay interest-only option. Her concern is leaving some equity for the kids. Only paying the interest still saves her a tidy sum each month that she used to pay with her conventional loan. Her equity-conservation strategy is a win-win scenario for her and her son Robert who is still building financial security. Unlike the poisonous pay-option loans of yesteryear, there are no surprise minimum payment hikes once the loan reaches a trigger threshold because there are no required payments.
“You can invent your own balloon payment and pay every three years. The reality is because there’s no due date you can never be late”, says Martin Andelman in his recent interview on HECMWorld. And, unlike your traditional mortgage one can recoup those payments should they need them for any reason without having to plead with the bank for a HELOC or a costly cash-out refinance. “If 35-year olds could get HECMs, it would be the only loan in the country”, added Andelman
So while we cannot market the Home Equity Conversion Mortgage (HECM) or any private reverse mortgage as a pick-a-pay loan, that’s precisely what it is- more accurately what it can be. A HELOC alternative, pick-a-pay, or 30-year mortgage? A reverse mortgage has the flexibility to be each when the homeowner says so.
We are much more than ‘mortgage-elimination’ specialists. We provide choices that may reduce risks for older homeowners. After all, isn’t nice to have options, even if you don’t need them?