I attended the National Reverse Mortgage Lenders Association conference last week in Huntington Beach, CA. Someone there shared a different perspective that I like.
A Home Equity Conversion Mortgage (HECM), reverse mortgage is a “Premium Mortgage Product”.
One of the industry trainers named Craig Barnes said the following:
“If we perceive value in something—a better brand of clothing, a type of car, food or cell phone plan—we are usually willing to pay more for it. But have we ever thought about paying more for a mortgage product where the line of credit grows, monthly principal and interest payments are not required, you never have to pay back more than the homes value and it’s government insured?”
In stating “paying more” he’s talking mainly about the upfront closing costs, specifically about the “initial mortgage insurance premium”(IMIP). The IMIP is 2% of the value of the home, up to a maximum value of $679,650. As you can see, 2% of a $400,000 - $600,000 can be a lot of money. However, there are a couple of points people considering a reverse mortgage should consider:
- The closing costs are not “out of pocket” costs. Most, if not all of the costs, including the IMIP, are rolled into the loan.
- For those people who live in their home until they pass away, they never actually pay any money for the reverse mortgage. Of course, like all homeowners, they must pay their property taxes, homeowners insurance and maintain the home, but they never paid any money out of their pocket for the reverse mortgage.
Let’s take a closer look at the benefits the Barnes presents that make this a “Premium Mortgage Product”:
- “The line of credit grows” – Anyone who uses all or part of the proceeds from a HECM reverse mortgage to establish a line of credit will see that amount grow larger over time. The HECM line of credit has a growth rate that is equal to interest rate they are charged on the loan balance, plus 0.5%. For example, if the interest rate that you are charged on your loan balance is 4.75%, the growth rate on your line of credit will be 5.25%. This growth rate changes as your interest rate changes.
- “Monthly principal and interest payments are not required” – No HECM reverse mortgages require you to make interest and or principal payments. However, you can if you choose. Depending on the loan program you choose, the amount you pay will go to reduce your loan balance and increase your line of credit.
- “You never have to pay back more than the home’s value” – All HECM reverse mortgage loans are 100% non-recourse. You never have to make a principal and interest payment on a reverse mortgage, but the money from this loan is not free. You will still be charged interest and ongoing mortgage insurance on a monthly basis. Since you are not required to pay these, the amount that you are charged is added to your loan balance. In theory, your loan balance can exceed the value of your home, but you are never responsible to pay it and you can never be evicted because this happens as long as you continue to pay your property taxes, homeowners insurance, and maintain the home.
- “It’s government insured” – This means that if you have money in the line of credit or are receiving a monthly check from your reverse mortgage, that is insured by the government. If the servicer were ever to go out of business, the Department of Housing and Urban Development (HUD) would step in and make sure that you received your funds until they found a new company to service the loan.
Given these advantages, I’d say the Home Equity Conversion Mortgage is definitely a “Premium Mortgage Product”
Please feel free to comment about this article or contact me directly with any questions at 303-467-7821.