See How the New Reverse Mortgage Products Compare

With more and more products being released everyday, IBIS has published a calculator showing the different reverse mortgage options that are available in the marketplace.

According to calculations from IBIS, a 73-year old borrower in a $250,000 home gained $4,803 in initial benefits by having no service fees. Then they gained an additional $4,500 by having no origination fee. That’s a $9,303 increase in benefits in a couple of weeks. But with a fixed-rate HECM, borrowers must take all of their benefits out as upfront cash.

“The extra money they have to withdraw versus an adjustable-rate reveres mortgage costs them 6.231% per year (5.56% plus MIP compounded monthly),” said Jerry Wagner, President of IBIS in an email to RMD.

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He added that PenFed is now displaying an annual adjustable rate HECM with no service and origination fees. The loan is a Treasury-based HECM with a 2.50% margin. “On first glance, this sounds like the dream product, but its available cash is considerably less than a LIBOR-based HECM with a 1.75% margin and full fees (and also less than the full-fee fixed HECM),” said Wagner.

It’s main benefits are not having to take all the cash upfront and having no origination fee. Lower upfront costs will be attractive to those who don’t know how long they may stay in their home and it has a materially lower lifetime rate cap than a monthly-adjusting HECM.

IBIS said it will be updating the new tool as products are released so people can run their own scenarios. Companies can also license the tool to show specific lenders products. You can see it in action here.

Companies featured in this article:

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  • As we move into LIBOR HECMs with waived/reduced SFs and OFs, it becomes even more important to take anticipated occupancy (i.e., duration) into account in calculating potential borrower benefit, esp if an LOC is involved. A higher margin with reduced fees provides less NPL initially, but at some point in the future the higher growth rate may result in a larger LOC balance than a lower growth rate on the larger initial NPL from the lower margin product. Our jobs are getting a little more complicated…

    • Jim,

      I for one have never understood why these “extra” growth issues are so extremely important. While growth is a big benefit, comparing it to other rates that are very close seems more of a contest of “manipulators” than a meaningful or substantative exercise for the true benefit of the senior.

      The growth is nothing more than an increase in available loan proceeds — that's all. If these were investment returns on an after tax basis that resulted in significant differences, that would be understandable; however, LOC growth does not fit into that category unless we are looking at taking the proceeds at near the end of the HECM because we KNOW that selling the home will produce less cash. In that case one would have to factor in the tax gain (if any) that would result from the cancelled debt, hardly the exercise for the less sophisticated….

      Maybe you can put it into a better light but I go back to the old adage, “figures lie and liars figure.” What real benefit does a higher LOC growth give to most seniors who wait 10 years to use it? It kind of reminds one of deferred annuity arguments. If the loan terminates before they use it, that extra growth means absolutely nothing. It certainly cannot be passed on to heirs unless the borrower takes it out before death. For some of us who have been around for a while and have seen some use this kind of tactic to convince seniors that higher interest rates are “really” better for them, think of this marketing tactic as predatory.

      • I would disagree: I believe comparing the growth rates of the LOC is an important and valid exercise for those seniors who are using their HECM as 'liquidity insurance' for their later years. Because the growth is independent of the value of the real estate and tied rather to prevailing interest rates (via the LIBOR index), I think it is more comparable to an investment – solely for the benefit of the borrower and not his/her heirs – than you allow. The “value” of the “investment” in this light is limited to cash available for use by the borrower at any given point, but that is real value nonetheless.

        Regarding the issue of taxable gain on debt forgiveness, I'm still looking for definitive word on that. (The argument against taxability being that the shortage is paid by “insurance” for which the borrower has paid a premium.) If you have found either IRS ruling(s) or tax case precedent for the treatment of HECM debt forgiveness as taxable income, please let me know as I have a real interest in the subject.

  • All LOC growth comments above have no relevance. Servicers do not raise the LOC by the note rate plus MIP each month. We tell borrowers that, but it's not so. Check some monthly statements.

    • whart,

      If you are telling borrowers that information, you are right that is not what is going on. You may want to read the RMD article dated August 3, 2009 titled “Are Reverse Mortgage Credit Lines Really Shrinking?” If you are not familar with the principal limit approach to the computation, I think that article will help.

  • As to the income tax issue, on June 12th and 23rd last year, Jim Veale wrote two articles on that subject.

    As to the computation, the math is similar for investments but one is an asset producing income while the other is a debt accruing interest. When risk is approximately the same, an asset earning higher net income after income tax ramifications is usually the wiser choice. In a similar fashion it seldom makes sense for anyone to obtain a higher interest rate debt just to obtain a marginally higher available lines of credit since a lower balance due is preferrable to a greater one if proceeds are similar. If the chances of the senior living to see the higher line of credit it might make sense but that is a mortality issue at best.

    There is absolutely no economic substance to an increased line of credit unless it will be used. Even then it is just a contingent cash available asset for which a senior will be paying higher interest. If you can make a strong economic argument for that cost for most holders of a line of credit than you should be a spokesperson for deferred annuities. While deferred annuities may be a smart economic choice for a few seniors, it is a very poor investment decision for most.

  • whart,rnrnIf you are telling borrowers that information, you are right that is not what is going on. You may want to read the RMD article dated August 3, 2009 titled “Are Reverse Mortgage Credit Lines Really Shrinking?” If you are not familar with the principal limit approach to the computation, I think that article will help.rn

  • As to the income tax issue, on June 12th and 23rd last year, Jim Veale wrote two articles on that subject.rnrnAs to the computation, the math is similar for investments but one is an asset producing income while the other is a debt accruing interest. When risk is approximately the same, an asset earning higher net income after income tax ramifications is usually the wiser choice. In a similar fashion it seldom makes sense for anyone to obtain a higher interest rate debt just to obtain a marginally higher available lines of credit since a lower balance due is preferrable to a greater one if proceeds are similar. If the chances of the senior living to see the higher line of credit it might make sense but that is a mortality issue at best.rnrnThere is absolutely no economic substance to an increased line of credit unless it will be used. Even then it is just a contingent cash available asset for which a senior will be paying higher interest. If you can make a strong economic argument for that cost for most holders of a line of credit than you should be a spokesperson for deferred annuities. While deferred annuities may be a smart economic choice for a few seniors, it is a very poor investment decision for most.

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