Borrowers paying down reverse mortgages, a new trend?

Often thought of as only a one-way payment street, with reverse mortgage remunerations flowing from a financial institution to the senior customer, there are some recipients who actually prefer to make repayments to the lender; sort of a reverse/reverse.

“I have started to get requests from borrowers to look at the option of making payments on reverse mortgages,” reports Angella Conrard, reverse mortgage advisor, National Aging in Place Council, Orange County, Calif., and founder, National Care Planning Council. South OC.

Conrard tells of “one client who just got a reverse mortgage – it was a fixed rate. He needed the money now for various reasons (repairs from hurricane Katrina, grandchild’s education, and new car), however he worked himself out a payment plan to pay it back for 15 years.” Yet, another client, “in her early 60s who is looking to improve her financial freedom by doing the reverse mortgage, just wants some temporary relief for couple of years (she is still working), until her retirement income increases,” according to Conrard. “At that time, she plans to make some payments towards the reverse mortgage, so she can retain more equity.”

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Nikolay Ratajczak, Advent Financial, Inc., says of the reverse/reverse, “Borrowers feel good about the ability to later repay or lower the balance at any point in the future. This sentiment may be increasingly important if passing along equity as an inheritance is of concern to the borrower.” Ratajczak points out, however, that “it may later prove difficult to pay down the reverse mortgage because of other priorities or limited cash flow.”

He believes more interest will develop in the repayment concept with the advent and acceptance of the HECM Saver, “if it is utilized for short-term needs, or as a withdrawal and repayment type of account.”

Conrard offers the suggestion to lenders that they set up specific programs or statements that would show various payment options a consumer can use if they choose to make payments on their reverse mortgage.

Written by Neil Morse

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  • Several years ago I originated HECM’s for a retired Minister in Northern California, and his best friend, another retired Minister from Central California. They use their Credit Lines to loan funds to their congregation members, when necessary, and pay back the Credit Line when they’re repaid. I love that strategy.

    • 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.

  • 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.

    • 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?

      • 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 helped a few borrowers with low mortgage balances and/or free & clear title take out ARM HECMs with the specific intent of prepaying. The idea was that they would repay the balance (payoff + closing costs & MIP+ balance growth) in order to restore the Line of Credit to its maximum potential amount. The Line of Credit would serve as the funding vehicle for Long-Term Care needs & costs.

    This happened well before the Saver was introduced, so these borrowers did have to repay the MIP cost, but they all wanted access to a larger source of funding than a HECM Saver would have created.

  • James,

    My compliments to you. Your comment is great advise for any originator who reads it. I could not think of a better comment to make. Your comment is a good educational course.

    Thank you James,

    John Smaldone

  • I believe the “trend,” if it gains momentum, should be characterized as “reverse-forward.” In addition to the excellent points Jim Veale made above, there are potential pre-payment speed risks for investors.

    • dduck12,

      I apologize that I have not written before this but I usually do not go back to articles this old.

      Answering your request is not simple and would require a book to answer. An answer today may be quickly outdated. Advice will be based on many factors including the tolerance of the borrower for risk. I would never advise fixed rate HECM borrowers to pay down the balance due as aggressively as an adjustable rate HECM borrower and not because of concerns over the adjusting nature of the interest rate on open end HECMs. With the adjustable rate HECM, the borrower can always get their payments back if they are later needed while the fixed rate borrowers cannot.

      Much different than other adjustable rate mortgages, as long as loan covenants are met, lenders cannot decrease the available line of credit or terminate them. That means as long as the borrower does not enter bankruptcy, move to another principal residence, or violate other loan covenants, not only will the unused line of credit be available when it is needed but the unused line of credit will generally grow; that is part of what FHA guarantees. While voluntarily paying off a fixed rate HECM may be a good idea, it is rarely so with an adjustable rate HECM. Most of the time we advise adjustable rate HECM borrowers to leave a few hundred dollars due unless there is a monthly servicing fee and in that case the situation should be looked at on a case by case basis. As long as an amount is due, the adjustable rate HECM will not terminate until it otherwise becomes due and payable.

      So even with those who are looking at paying down a HECM, one has to look at many factors that can even slow down the rate of pay down. Thus to try to reduce such analysis into a comment is next to impossible especially when asked to provide a comparison.

      Since I know you are your own financial advisor, the best thing to do is to put together a proposed payment schedule and then work with a reverse mortgage originator to create what we incorrectly call an amortization schedule. But you will have to do your own if you want to look at changing interest rates over time. Remember HECMs have no prepayment penalties.

      Before doing your math homework, make sure you compare loan covenants. Look to see if you will be able to live with them.

      Then you will want to determine total finance costs and APRs based on the specific schedules you prepare. After doing all of the math, you then need to see what makes the most sense to you based on your own financial habits, tolerance for risk, concerns and projections about interest rates and other risk factors in the future, and other personal considerations. I am assuming your spouse will remain on title and will be a co-borrower so you will want her input (or maybe not).

      Then like most of us you will still wonder if you did the right thing after getting the loan. But as long as you did sufficient homework you can sleep with the idea that you choose the worst except for all of the other options, kind of like “the US government is the worst form of government, except for all of the others.” Unfortunately there is no simple way to present it since there are more concerns than there are borrowers.

      Best of luck with your analysis.

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