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Feb 05, 2007

Evaluating the true cost of a reverse mortgageNelson A. Locke, CRMLreverse mortgages "Gee, that's expensive." "Wow, look at those closing costs." "This is a lot more expensive than a regular loan!" If you are thinking of entering the reverse mortgage niche, you'd better anticipate these comments and prepare up front to respond appropriately. Otherwise, you will not succeed. The ability to modify a client perception that is fear-based, emotional or just plain closed minded is one of the greatest skills a reverse mortgage specialist can develop. Are you up to it? Do you know how to compare these products? By the time you finish reading this, you should have a much better grasp of the pros and cons of the costs of obtaining a reverse mortgage. For purposes of this article, we will use the Home Equity Conversion Mortgage (HECM) as our point of reference. The HECM is the Federal Housing Administration (FHA) product that accounts for almost 90 percent of all reverse mortgages placed. The first step in evaluating reverse mortgage costs requires that you be familiar with reverse mortgage underwriting criteria. 1. There is no requirement for good credit. 2. There is no requirement for assets or asset verification. 3. There is no requirement for income verification and no potential fraud in the stated income to qualify. 4. There is no requirement that certain types of repairs be completed in advance of closing. 5. There are no prepayment penalties. 6. There are multiple payout mechanisms available, which are easily changed as circumstances require. 7. There are no personal guarantees. 8. There are no default judgments in the event the property value declines. 9. There are very low up-front costs; closing costs are deferred. You should expect to explain the FHA mandatory mortgage insurance premium. It appears costly, but its payment is deferred and guarantees continuity in payments to the senior. It also insures the borrower against certain default judgments. The benefit would seem to exceed the cost. Also, title insurance can be more expensive because it is figured on a growing loan balance. This is necessary to protect and encourage an active secondary market to keep on funding loans that have no inbound cash flow. The second step requires you to be able to explain clearly the differences between reverse mortgage qualification and traditional lending. If you were to create a chart to help you compare, here's what it might look like. Reverse mortgages No income verification No assets needed. No credit record needed. No personal guarantees. If property value drops, you don't pay. No monthly payments ever. You don't pay up-front costs. No income tax issues! Traditional loans Prove your income! Prove your money. You'd better have credit. You guarantee the loan. If value drops, you pay! You pay and pay and pay. Get out your checkbook. Possible tax issues. The last step in understanding the true value of a reverse mortgage is to do the following: Before you meet with your client, spend a moment comparing what a stated-income, no-asset-verification mortgage with a prepayment penalty would really cost. And be honest. Don't use the yield spread premium tactic to hide the costs. Here's what you will discover. The reverse mortgage at a current expected interest rate below seven percent with a total loan cost under nine percent would be five to six percent cheaper than the type of loan a senior might qualify for if all the questions were answered honestly, and there would be no monthly payments to boot. What's that worth? Always explain the total annual loan cost (TALC) as follows: The TALC is the reverse mortgage equivalent of an annual percentage rate statement, otherwise known as the Truth in Lending (TIL) disclosure on the forward side. TALCs don't lie. These are numbers based on facts. The TALC includes the mortgage insurance premium and title insurance discussed above. Compare the TALC with the TIL statement. If your client fails to see the value, then you know you are dealing with an emotion-based reaction and the costs arent the true issue. Keep digging. I hope this helps you to deal with one of the most promulgated myths about the reverse mortgage niche. Expensive? Compared to what? Nelson A. Locke, CRML is a past president of the Florida Association of Mortgage Brokers, a founding member of the National Reverse Mortgage Lenders Association, the founder of the Association of Reverse Mortgage Specialists Inc. and CEO of Value Financial Mortgage Services Inc. He hosts the public television program "Ask Mr. Mortgage," discusses reverse mortgages daily on AM radio and designed the FAMB training course "Understanding Reverse Mortgages." He may be reached at (800) 760-5363 or e-mail [email protected].
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