Neither MLOs nor borrowers should assume that all payback plans have equal merit. Borrowers (specifically cash method taxpayers) who can benefit from the deduction of home mortgage interest should judiciously determine when payment of the interest will result in the “biggest bang for the buck;” rarely will monthly payments be in the best interest of such borrowers. Usually these borrowers should look at making such payments in lots of 24 to 36 months once every other or every third year at most; some may want to defer payment of interest still longer. In between they should save the “monthly payments” in interest bearing accounts. Here home equity is not the issue but rather the overall “equity” of the homeowner which is far more critical in competent estate planning than mere home equity.

If a HECM borrower expresses the goal of paying down their balance due at any time before maturity, a fixed rate HECM is rarely advisable. If the borrower pays down such loans, they cannot retrieve such payments if they need them in the future. We are all familiar with the old and questionable strategy that borrowers can always refinance when they decide to pay the loan down; not only will these borrowers incur refinancing costs but also there is no guarantee that they will be able to refinance due to possible value issues, accruing costs, and last but not least, the real possibility that the lending limit could go down. That is precisely why one in that situation should carefully look into an adjustable rate HECM, whether Standard or Saver. Lenders should train their MLOs in these matters and underwriting should carefully review all fixed rate HECMs, especially those where the borrower expressed an interest in paying down the balance due at any time before maturity.

Merely looking at Savers as the vehicle which will tend towards prepayment is a common assumption in the industry. You know what they say about assumptions: “They make a donkey out of me and a donkey out of you” (just replace donkey with the appropriate three letter word). However, it is not Saver versus Standard which originators should be looking at when a borrower talks about prepayments but rather fixed versus adjustable. Saver versus Standard is a completely different subject which needs to be addressed. The pay down of a Standard adjustable has all of the advantages of a Saver adjustable (except for the disadvantage of more MIP upfront offset by the advantage of more available proceeds).

More than ever those originators who want to remain relevant in all aspects of the reverse mortgage industry need to learn and understand the principles related to not only reverse mortgages but also how reverse mortgages fit into money management, financial planning, and, yes, even tax planning. Reading this article displays certain aspects of the very real and prevalent problem of not staying current and just as importantly, becoming irrelevant (whether quickly or slowly).

Finally all prospects who express any interest in prepayments should be advised to see not only a competent, knowledgeable, and experienced financial advisor but tax advisor as well. Knowing financial and tax principles will help you understand if they are receiving proper advice.

Mr. Denton,

While that may be admirable in your eyes, it could prove financially disastrous for the ministers and work out to be a long-term financial problem for their families. As the old saying goes: “No good deed goes unpunished.”

Hopefully they have the financial backing of church members if worse comes to worse because under California state law the church cannot come to their rescue because of their poor lending decisions even if well intended and involving church members only.

Great info, thanks. I wish you had a way of explaining the complexity and versatility of RMs to the average financial planner and non-estate/elder lawyer.
BTW: If a client expresses that they intend to pay back their loan, is an RM the best option?

Jim –
Well said. Happy New Year!

dduck12,

That is not an easy question to answer. In writing the response, it started taking over two pages in Word. At that point, it became evident the best way to answer your question is to say yes and then add BUT…. A great general principle when it comes to HECMs is: “Everyone over 50 should know all they can about HECMs but HECMs are not for every eligible senior.” That adage should be expanded to all reverse mortgages.

Those who oppose the program discuss the loss in home equity, high costs, etc. However, they never get to the differences in cash management, tax planning, estate planning (not estate tax planning although it could come into play there although very unlikely), the enhancement of effective and efficient direct and indirect distribution of assets to heirs both in life and through death, current family support of both senior members and the younger generations, income tax planning, etc., etc. The eyes of most of those opposed to a wider use of HECMs are focused solely on who they believe should obtain this product, the financially desperate and the poor; they by and large do not understand personal financial planning.

Oops, this is growing into too much information so here the discussion stops unless you have some specific questions.

By the way, Happy New Year to all!!!

I still don’t see any advice as to options other than an RM for those contemplating pay backs.