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].
