Personal Finance Columnist Changes Stance on Reverse Mortgages

Long time skeptic of the reverse mortgage program, financial columnist, Elliot Raphaelson is now changing his mind on reverse mortgages, he writes in a recent article for the Chicago Tribune.

Raphaelson has been writing about reverse mortgages for five years, but recent changes to the Home Equity Conversion Mortgage program are helping him realize how beneficial they can be for the right homeowner.

The main reason why Raphaelson is taking a second look at reverse mortgages has a large part to do with the legislation passed by the Federal Housing Administration (FHA) in 2013, he writes in the article.

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Another large part he shares is that lenders are now offering much lower closing costs and more attractive line of credit options for borrowers. The newer non-borrowing spouse rules that were also put into place also played a factor in his re-assessment of the program.

Raphaelson makes the case for reverse mortgages by comparing them with a standard home equity loan.

“When a reverse mortgage borrower chooses to take the distribution of funds in the form of a line of credit, it can offer several significant advantages over a standard home await loan (HELOC),” he writes.

The main difference between a reverse mortgage and a HELOC, he points out is that the line of credit on a reverse mortgage can’t be cancelled, but there’s the risk of not being able to renew when the initial term is over when using a HELOC.

Another benefit a reverse mortgage has that a HELOC doesn’t is that the borrower doesn’t have to repay the interest and principal as long as your contract is in effect, but with a HELOC, the borrower is required to pay these fees within a given amount of time.

Above all, Raphaelson touches on the fact that with a reverse mortgage, if a borrower uses the line of credit, the line can increase over time. This is not the case with a HELOC.

Overall, Raphaelson shares that potential borrowers should do an in-depth assessment of their situation because if they want to stay in their home for a long time, a reverse mortgage could be an advantageous option.

Read the full article

Written by Alana Stramowski

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  • If I read the article correctly, does the author (Raphaelson) claim the line of credit growth rate is HIGHER as the interest rate is LOWER?

    “Third, with a reverse mortgage your credit line can increase over time. (The lower the interest rate, the higher the potential increase.)”

    I am certain this is not the case since the line of credit grows at the same rate as the loan balance grows (effective rate of margin + index + mortgage insurance). As the rate goes up, the compounding growth rate would also increase.

    I’d hate for the “positive spin” from the media to still be founded on misunderstanding of the product.

  • I read the article carefully but I did not interpret the article to read the way David Rosengarden interpreted it.

    I realize Elliot Raphaelson mentioned the line of credit in many different areas of the article but I never read into what David stated he did? I stand to be corrected but I have not seen anything where he said “the line of credit growth rate is higher as the interest rate is lower”?

    If I am wrong, please point it out to me where it says that?

    I will say that at least what Raphaelson said was more optimistic than he ever has been in the past, this is at least a start for him.

    On the other hand, I don’t know if I understand or agree with what he said when he stated, “Lenders are now offering much lower closing costs and more attractive line of credit options for borrowers” I am confused by that statement.

    As far as closing costs, they are lower in an example if the borrower stays within the 60% of gross principle limit. However, they are higher if the borrower is forced into taking an amount which would exceed the 60% rule. What I mean by that is, the MIP would go to 2.50%.

    On the other hand, lenders are becoming more competitive and we are seeing origination fees being waved a majority of the time. Elliot may have been referring to that?

    In the case of more attractive line of credit options, he has me on that one. I don’t know of any more attractive line of credit options, I could be wrong and if I am, please someone let me know, I would appreciate it.

    Like I always say, I am smart enough to know I am NOT smart enough!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      The third to the last paragraph of the article starts as follows: “Third, with a reverse mortgage your credit line can increase over time.” It then has a sentence in parentheses that reads as follows: “(The lower the interest rate, the higher the potential increase.)” That sentence literally makes no sense. It does not recognize that there are two interest rates with all HECMs with lines of credit. It is the expected interest rate that controls the available proceeds at origination and the other note interest rate is the variable factor that controls rate that the available line of credit grows by.

      If growth of line of credit is what is desired the best result is for the margin to be the rate that makes the expected interest rate reach the floor (5.06%) without exceeding it. For example, if the index portion of expected interest is 2.65%, then the expected interest rate margin would be most effective at 2.41%. This would provide the highest note interest rate that also allows the expected interest rate to provide the most available proceeds at closing.

    • John,

      See the direct quote in my comment post. That wording was taken directly (copy and paste) from the subject article.

      In direct parenthetical statement to the primary statement that reverse mortgages increase over time, the author claims a lower interest rate has an inverse relationship to the rate of credit line increase.

      We all know that higher rates on HECM have a direct correlated relationship to the rate of HECM credit line increase, which is the opposite of what the author appears to state.

      I still read the author as stating incorrect information regarding this point.

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