How much can you lose if you don't find the best HECM deal?

 
Posted4/7/2018 6:00 AM
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The best deal on a mortgage is usually defined in terms of the interest rate and origination fee charged the borrower. That was my approach in a previous article on the subject.

I recently realized, however, that with reverse mortgages, it was more meaningful to focus on the amounts that borrowers receive in the diverse ways in which reverse mortgages can be used. That is my approach here.

Data source: Each week, nine reverse mortgage lenders update their prices on my website, which is the only available source of price data covering multiple lenders. For this analysis, I assume a borrower of age 64 with a house worth $400,000 in California. Five of the nine lenders operate in California, which means the borrower will receive at least five quotes -- more if any of the lenders post multiple rate and fee combinations, which most of them do. The prices are as of March 22.

Because the best deal on a reverse mortgage depends on the borrower's objective, my approach is to look at each of five common objectives. In each case, I compare the largest amount offered the borrower with the smallest amount.

Many reverse mortgage borrowers have an immediate need for cash, which may be to pay off a short-term debt or buy a smaller house. In contrast to other objectives discussed below, which can be met only with adjustable rate HECMs, this objective can be met with either a fixed rate or an adjustable rate HECM.

Objective 1: Using a fixed-rate, the largest amount available on March 22 was $100,225 from lender A; the smallest was $83,995 from lender D. The smallest quote was 84 percent of the largest.

Using an adjustable rate and including amounts that can be drawn after a year, the largest amount was $180,595 from lender C; the smallest amount was $143,594 from lender E. The smallest quote was 80 percent of the largest.

Objective 2: Obtain the largest possible future credit line.

At the opposite extreme from the previous case, some borrowers have no immediate financial cash needs, but want a rising credit line. A credit line can be used at any time to generate additional income and/or to meet unexpected contingencies, like future medical expenses. I compare the lines offered by the five lenders, unused after 10 years, based on their interest rate quotes on March 22.

Lender C provided the largest credit line in 10 years at $267,454. Lender E offered the smallest at $232,912. The smallest was 87 percent of the largest.

Objective 3: Obtain the largest possible tenure payment.

A tenure payment is a monthly payment for as long as the borrower resides in the house. Lender B paid the most at $830 while lender E paid the least at $803. The smallest was 97 percent of the largest. Right now I don't know why the spread on tenure payments is much smaller than on other HECM uses.

Objective 4: Obtain the largest possible payment for five years.

A borrower can draw a larger amount for a shorter period. If that period is five years, he could draw $3,285 a month from lender C or $2,745 from lender E. The smallest was 84 percent of the largest.

Objective 5: Obtain the largest possible credit line with a cash draw of $25,000.

Many borrowers use reverse mortgages for multiple purposes. For example, the borrower might need $25,000 in cash to pay off a mortgage and want the balance in a credit line on which she can draw at any time. That line would be $75,079 if obtained from lender C but only $55,819 if obtained from lender E. The smallest was 74 percent of the largest.

The differences in the amounts offered by the different lenders on my site understate the differences that exist in the market as a whole. The lenders on my site know they are being comparison-shopped. Further, none of them are among those that spend large amounts on advertising that have to be recovered by offering poorer terms to borrowers.

Over the market as a whole, the smallest amounts offered could be well below those on my site.

None of the five lenders in these comparisons offered the best deal in every transaction, and none offered the worst deal in every transaction. That means I can't advise borrowers to seek out a particular lender, or avoid a particular lender. The only valid advice is to seek out the lender who offers the best deal on your particular transaction and objective. This is very easy to do on my site, but very difficult otherwise.

If HUD had an interest in ensuring that senior homeowners received the largest possible benefit from the federally-supported HECM program, it would certify multi-lender sites that make it easy for seniors to find the best available deal.

• Contact Jack Guttentag via his website at mtgprofessor.com.

2018