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Back to Reverse Mortgage Basics - The two negatives

By Michael Pinter

Mortgage and Lending with First Meridian Mortgage

June 20, 2008 04:27 AM

There are two negative aspects of a of Reverse Mortgages: 1) the closing costs 2) The compounding negative ammortization

Closing Costs - Obviously this is a big issue. Costs for a Reverse Mortgage can be high when you compare them to a regular "forward" loan. Costs for the most popular Reverse Mortgage product, the Home Equity Conversion Mortgage (HECM) are high because of the fee to FHA and other costs. There is no way around this, BUT, the question is how can you compare a Reverse Mortgage to anything else? There is nothing in the world that can give someone the peace of mind that they will be able to live in their home for as long as they want to. Reverse Mortgages are only for borrowers who plan to stay in the home for a significant length of time (see yesterday' s post.)The costs are high, but in many cases, a Reverse Mortgage is still the best choice.

Compounding Negative Ammortization - This is the opposite of the first problem. The closing cost issue makes a reverse Mortgage problematic if you pay it off very quickly. The compounding interest issue only arises if you stay in the home for a very long time. The reality is that all ofthe owner's equity can be depleted over time. BUT, the obvious question is: How much benefit did the borrower receive over that time. ALSO, all Reverse Mortgages are non-recourse loans, which means that the borrower can NEVER owe more than the value of the home.

On Monday, we'll talk about the many benefits that a Reverse Mortgage can provide.

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Anonymous

David Bennett

Good points Michael, and it is important to go over what the fees and costs are ... full disclosure.

As you know, the reverse mortgage is different from conventional loans. Believe it or not, I have actually had folks thank me for them having to pay the "high" fees, really meaning the FHA insurance. I think if you are able to present the FHA insurance with this loan correctly, you really shouldn't have issues with the cost.

I personally love it when homeowners say the costs are too high, and love it even more when non-reverse mortgage loan officers say the same thing. That tells me exactly what they are thinking about and concerned with right off the bat, and although it can be a sticky objection at times, I can usually overcome that without problem. Plus, you aren't selling costs, fees and interest rates with these reverse loans, and if you are, you may just want to go back to conventional loans because you are missing the entire point of a reverse mortgage. OK, that's my two cents.

I look forward to Monday's article as the benefits of a reverse mortgage far outweigh the costs!

Jun 20, 2008 09:40 AM

Michael Pinter

First Meridian Mortgage - Brooklyn, NY

Thanks for the comment. Feel free to subscribe by clicking on the "Subscribe to this blog" button on the upper right. You will get my blog e-mailed to you every time I post.

Jun 23, 2008 02:08 AM

Ronald Gillis

Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL

CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

While the negative amortization & closing costs are somewhat of a down side of reverse mortgages, considering if they keep the home & loan for an extended time, the cost - APR can be much lower than almost any other mortgage product. The only real big negative to RM's are when the person is planning to move or sell the home in the next couple of years, because of the closing costs, then, the APR would be way too high in virtually all circumstances.

Aug 12, 2008 11:19 AM

Ron,

Believe me you are preaching to the choir. I believe in the product completetly.

The issue is two fold, first that we must present a balanced portrayal of teh product to teh prospective borrower. The closing costs are high if you compare tehm to other products and the entire remaining equity can be eaten away over time.

As for the APR, this is completetly dependent on an unkown, which is how long the loan will be in place.

Aug 13, 2008 01:25 AM

Sherri Duncan

By the X, LLC - Kansas City North, MO

I think there is actually a 3rd negative aspect for the overall use of the product itself. I believe that this is a good product and close them regularly but because the numbers are going up so quickly, what will happen to the housing market once a majority of these homes end up back in the lenders hands and back up for sale on the realestate market. The biggest value problems that we have right now are because lenders have been forced to flood the MLS with all the forclosed homes which have ruined values for most of the US markets. A large amount of the people who take out these loans either don't have family to take or who would want to take the house back after the borrower is either put into a care facility or passes on. These houses will end up being put back up for sale, usually in much worse condition than the property was in at the closing because the elderly do not do the upkeep and proper maintenance on their homes that younger more active families with more income would generally do. They now have tapped out their investment and won't want to put alot of money into something that is not going to give them anything else back. Not all, but the majority could easily fall into this category. So let's say that the market rebounds in the next 2-3 years or so, then in the next 5-10 years these start rolling back in, will we be back in the same boat we are in now? I think this is a very very likely senario that the markets will have to deal with in the future.

Sherri in MO

Aug 17, 2008 02:25 AM

Sherri,

Thanks for the comment. I disagree with you, here's why: the average lifespan of a reverse Mortgage is over seven years. this will probably grow to over ten in the coming years, but even at seven years, we are talking about loans that will only mature in a time when hopefully, the housing market will be in a much better place.

The Reverse Mortgage is infinitessimally smaller than the forward market. Less than 500,000 loans have ever closed. There is no way to know the condition of these homes at maturity, or if the lenders or heirs will take possesion of them.

I am the first one to speak out against making loans that will hurt us down the road. Because of the many variables, I don't think reverses can be put into that category

Aug 18, 2008 02:06 AM

Stagingworks

Reverse Mortgage can be a relative solution for elders to deal with their daily needs. Yet, some important things like the arrangement after they passed away will be another deal to concern. They need to be aware to some disadvantages like what you mentioned here. From TOronto Home Staging COmpany

Aug 06, 2009 03:06 AM

You are correct, thanks for the comment.

Aug 10, 2009 06:34 AM

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