The Rules Have Changed For Buying a House
With a HECM Reverse Mortgage
With a HECM Reverse Mortgage
When I wrote about purchasing a house
with a HECM reverse mortgage earlier this year, a major
issue faced by borrowers was whether to pay a penalty
insurance premium in order to maximize the cash draw on the
HECM. A few months after the article was written, HUD
eliminated the option of paying a lower premium if the
borrower drew less cash. The upfront mortgage insurance
premium is now 2 percent of property value regardless of how
much the borrower draws.
The advantage of buying a house with a HECM has not
changed. It remains the case that the HECM does not impose a
monthly payment burden on the borrower. The only
disadvantage is that the reverse mortgage will cover only
about 50-60 percent of the house price, depending on the
borrower's age, requiring the purchaser to find the
remaining needed cash elsewhere. The most common source is
asset liquidation.
Seniors who go this route have two decisions to make.
First, they must decide whether they want an adjustable rate
or a fixed-rate HECM. Second, they have to select the lender
offering the best terms. I will illustrate these decisions
with the case of Charles, who is 72 and wants to purchase a
$400,000 house on December 18, 2017.
Fixed Rate or Adjustable Rate?
Most seniors will select the option that provides the
larger cash draw. Among five lenders quoting a price to
Charles on my website, the largest cash draw on an
adjustable rate was $201,800 whereas the largest draw on a
fixed-rate was $194,600. The adjustable provided $7,200
more, which could settle the matter.
Or perhaps not. If Charles is concerned with the size of
his estate, he will also look at how large his future loan
balance would be. Looking ahead 10 years, for example, the
balance of the adjustable will be $389,356 compared to a
balance on the fixed of $406,386. He will owe $17,030 less
on the adjustable.
This is not quite the slam-dunk it may appear, however.
The future loan balances are calculated at the interest
rates on December 18, which were 3.21 percent on the
adjustable and 3.99 percent on the fixed. While the rate on
the fixed will remain at 3.99 percent over its life, the
rate on the adjustable could rise as high as 8.21 percent if
market rates increase. Were that to happen in the near
future, the balance on the adjustable would quickly come to
exceed the balance on the fixed. It is unlikely that the
risk of future rate increases will dissuade Charles from
selecting the adjustable, but it could.
The reverse mortgage market is extremely inefficient.
Except for those seniors who make their way to my website,
few try to shop. As a result, the prices of identical
transactions can differ materially from one lender to
another.
Even on my website, where participating lenders know that
their price quotes will be compared to others, price
differences are large. For example, on the day my
hypothetical house purchaser was quoted an adjustable rate
of 3.21 percent with a cash draw of $201,800, another lender
on my site quoted a rate of 4.76 percent and a cash draw of
$172,005, or $29,795 less. That was the worst quote among
five lenders who lend in California. The quotes of the other
three lenders were in-between the best and the worst.
Bottom Line
Seniors who want to purchase a house with a HECM and who
have no concern regarding the amount of home equity they
leave to their heirs can easily shop lenders for the largest
cash draw. They can shop multiple lenders with one visit to
my site, or by contacting individual lenders one lender at a
time. If they shop by contacting individual lenders, the
process should be completed within a week ending on a Monday
because HECM lenders reset their prices on Tuesday.
Purchasers who do have a concern for what their heirs will inherit will want to see not only cash draws but also projections of future loan balances that are consistent from one lender to another. My site is the only place they will find that.