In the final installment of a five-part series on reverse mortgages, The Mortgage Professor, also known as Jack Guttentag, advises consumers on shopping around for the loans.
Guttentag advises borrowers to select the loan option they will use before they shop. In other words, they should know whether they want a Saver or Standard at a fixed rate or an adjustable rate.
Finding that websites for reverse mortgage shoppers are largely un-user-friendly, Guttentag visited the sites of 42 reverse mortgage lenders in California and found only one—All Reverse Mortgage—to be complete.
The websites of HECM originators are not designed for shoppers. I visited the sites of 42 HECM lenders in California who belong to the National Reverse Mortgage Lenders Association. Only seven showed HECM prices without requiring me to identify myself, and on six of the seven, the data was incomplete and user-unfriendly. Only one — All Reverse Mortgage Company — provided data that was both complete and readily understandable.
…A potentially confusing feature of HECMs is that they use two interest rates. The “expected” rate is used at the outset to determine the net principal limit (NPL), which is the maximum amount the borrower can draw. The loan rate is applied to the loan each month to calculate the interest that is added to the balance each month.
This is not a problem on FRMs because the loan rate is the expected rate. Because a higher rate and higher fees reduce the NPL, borrowers can shop the NPL — the HECM offering the largest draw is the best.
Unfortunately, there is an important exception to this rule. The Department of Housing and Urban Development (HUD) does not recognize expected rates below 5 percent, so that an FRM at 4.5 percent and at 5 percent that are otherwise identical have the same NPL.
Hence, the simplest way to shop for an FRM is to seek the lowest loan rate. If you are faced with a choice between lender A who has a lower origination fee and lender B who has a lower rate, choose the one with the lowest future loan balance in the year that is your best guess as to how long you will have the mortgage.
Written by Elizabeth Ecker