FINANCIAL ADVISOR CHANGES HIS MIND ABOUT HECM MORTGAGES
By Michael Taylor — Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules For New College Graduates.” (Click on this link for more on Taylor’s credentials).
August 24, 2018 Updated: August 24, 2018 7:20am
A reader named Jesse, 73, called to relay his experience trying to get a reverse mortgage on his house, and to ask for my advice.
He’d seen advertisements by Tom Selleck for a company called American Advisors Group and it seemed to fit his financial circumstances. A reverse mortgage, sometimes called a home equity conversion mortgage, is only available to homeowners over age 62.
Home equity, I should clarify, is the difference between the value of a house and the amount of debt on the house. That means a $300,000 house with a $100,000 mortgage has $200,000 in home equity. A reverse mortgage is a kind of home equity loan, specifically to borrow in old age without having to make payments, if you don’t want to. For Jesse, his idea was to use the money he could pull out of his house to help pay for taxes and insurance in the coming years.
I had never paid much attention to reverse mortgages, although I’d previously had a vaguely negative feeling about them.
In the course of following up on Jesse’s inquiry, I learned two unique and kind of awesome features of reverse mortgages which I have never seen in any other loan product.
First, a borrower can decide to never make any principal and interest payment on the loan. For life! The debt accrues interest of course, meaning it grows over time, but the borrower can choose to never pay on that interest or principal. The lender gets paid back eventually, when the house is either sold or the owner dies, but in the meantime the loan doesn’t require any payments. Ever. I’ve never seen that loan structure before.
Second, as long as the homeowner complies with the mortgage agreement – which means staying current on taxes and insurance – neither the homeowner nor the homeowner’s spouse can be evicted from the house. Ever. It’s a bank loan backed by collateral, but the bank can’t take the collateral for the life of the borrowers. This is also something I’ve never seen before.ll describe my three previous issues with reverse mortgages, as well as my evolving views.
My first worry was that as a relatively unusual loan product, consumers could be more likely to make bad choices about a thing they don’t understand very well. Even a traditional home mortgage can seem complex but it resembles other products we’re familiar with, like an automobile loan or a personal loan.
A reverse mortgage, by contrast, acts a bit like a retirement account or annuity, in that you can take money out over time as you get older. It’s also a bit like a credit card or home equity line of credit, in that it “revolves,” meaning you can take money out but also pay it back as often as you like. But it’s also different than a credit card or home equity loan, because you don’t have to pay it back with regular or even any payments (until you die). One of my guiding principles of finance is simplicity. Reverse mortgages may be a complicated form of debt for some people, and complicated is the enemy of the good.
Somewhat reducing my fear, however, is that every prospective reverse mortgage borrower must take a financial counseling course by phone, mandated by the Federal Housing Authority (FHA), which regulates reverse mortgages. Guy Stidham, owner of Mortgage of Texas and Financial LLC, a San Antonio-based mortgage broker who offers both traditional and reverse mortgages, says these courses cost about $150 and take a few weeks to schedule, which serves as a kind of “cooling off” function for prospective borrowers. (Disclosure: I have done consulting projects for Stidham in the past.)
My second worry was that reverse mortgage would be niche-y, high cost products for borrowers. This fear turns out to be somewhat unfounded, although there’s some nuance to the cost issue.
Joe DeMarkey, Strategic Business Development Leader of Reverse Mortgage Funding, a reverse mortgage lender, estimated fixed rates now between 4.375 and 5.125 percent, in the same ballpark as a traditional 30-year mortgage. So, I should not have been so worried about high interest rates on fixed loans.
Technically, however, DeMarkey points out that 80 percent of reverse mortgages have floating interest rates. With floating rate loans, the initial interest rate often starts out reasonably low but there’s always a risk that future higher interest rates make that same debt more expensive later.
Also, Stidham allows that a broker like him can be compensated more by the lender to sell a reverse mortgage in part because they are a less competitive product. His fee for brokering a reverse mortgage could be up to 3 times higher than with a traditional mortgage.
My third problem with reverse mortgages was that they clashed with my traditional view of the incredible wealth building potential of home ownership – a way to automatically build up a store of wealth by making affordable monthly principal and interest payments on your house over a few decades. Because reverse mortgages drain that value over time, they made me want shout “Wait…But that’s…that’s not how it’s supposed to work!”
But, you know, I can evolve. It remains a noble goal to fully pay off your home mortgage, and we should all aspire to do that. But that’s not reality for everyone in retirement. Reality for many is that accessing the equity built up in our house, without selling it, might be a key to living comfortably in old age.
As my wife reminded me recently, one of my other long-standing theories of personal finance is that kids shouldn’t inherit stuff. Since we don’t intend to bequeath our house to our girls, I shouldn’t be opposed to draining the house of our home equity once we hit our 70s or 80s. At that age, the goal shouldn’t be to continuously build up assets (For what? For whom?) but rather to spend money to make our lives better.
If we planned to stay in our house, my wife and I recently agreed we’d be open to a reverse mortgage in our 70s.
Does this seem like your circumstances?”
For detailed information about whether you should entertain a reverse mortgage (Home Equity Mortgage Conversion (HECM)), open the “information” tab on the home page for contact information, and answers to your questions. There’s lots of information on this webpage designed to help solve your questions. Thank you for considering HECM. “I’d be happy to support you — talking to me won’t cost you anything at all,” Warren Strycker, veteran mortgage professional. (928 345-1200)