As many of my regular readers know, my financial services company added reverse mortgage loan (HECM) origination a few years back. Clients had asked for it, so we investigated this “financial instrument” thoroughly before adding it to our services. Since that time, we’ve helped dozens of people leverage Home Equity Conversion Mortgage (HECM) loans to meet their needs. I recently sat down with Mike Peerless (NMLS #1073735), Director of Reverse Mortgages at Holland Mortgage Services, Inc. (NMLS #1432962), to discuss our firm’s progress and industry trends.
While these loans have been typically used to access home equity for cash, or to refinance an existing mortgage to eliminate required mortgage payments, Mike shared that an increasingly popular use of reverse mortgage loans is the HECM for Purchase. Instead of using it to get cash or refinance an existing home mortgage, the transaction order is, ironically, “reversed.” The loan is taken out and used, along with the borrower’s down payment, to purchase a new home.
Here’s an example: A 68-year-old woman has $200,000 cash available to purchase a new home, but does not want an ongoing mortgage payment in retirement. She shops around, but doesn’t find anything she likes for $200,000. Then, she finds exactly what she is looking for . . . but the price tag is $330,000. She realizes she wants a nicer home than she could afford with her $200,000 cash. With the HECM for Purchase, our 68-year-old could buy the $330,000 home and not have an ongoing mortgage payment. However, she would still be required to pay property taxes, insurance, homeowner’s association dues, and maintenance expenses. She would borrow $152,000 from the reverse mortgage lender and write a check at closing for $196,000. (My numbers are rounded to the nearest $1,000). When the HECM for Purchase transaction is complete, she has the home she wants, a loan, and no required mortgage payments. As with any loan, there are fees and expenses that would add to her purchase price. There is also interest on the loan and an ongoing Mortgage Insurance Premium that will grow unless she opts to make payments – which she can do at any time. And, just like a traditional home mortgage, she can sell the home and pay off the loan.
Part of the job of a loan originator, of course, is to walk the borrower through the process of getting a reverse mortgage loan, compare lenders, and explain all the fees and expenses involved. For anyone who is interested in a reverse mortgage loan, it is important to remember that there are different kinds and uses. Fees will vary among lenders and originators. These loans are not for everyone, but we can say the same for just about every financial product available: mutual funds, annuities, Long-term Care insurance, REITs, hedge funds, bonds . . . none of them are appropriate for every person and situation.