CNBC included reverse mortgages in a list of “innovative approaches” to protecting retirees’ portfolios in down times, citing a financial advisor who said he and his colleagues would be “remiss” if they didn’t suggest Home Equity Conversion Mortgages as a potential option.
Rob O’Dell, a certified financial planner in the Naples, Fla. office of the Coyle Financial Counsel wealth management firm, told the network’s website that the reverse mortgage industry has “cleaned up this space to benefit the end consumer.”
“The HECM positions the portfolio for longevity, O’Dell said, by having the client tap the line of credit instead of assets when the market is down,” the post notes, echoing an increasingly popular angle for promoting the reverse mortgage. “In this way, assets are preserved and have the opportunity to keep growing through the years.”
O’Dell also suggests that borrowers work directly with lenders, and not through third-party brokers.
“Going lender direct, not through a broker, means very low closing costs. And clients are not pressured to withdraw money as with a traditional home equity line of credit or reverse mortgage,” O’Dell told CNBC.
The post warns consumers that HECMs still require HUD insurance premiums and lead to the accrual of debt, but generally positions the product as a tax-free way to diversify consumers’ retirement plans.
“The HECM allows the borrowers to be in control of their loan and payment terms, not the lenders,” O’Dell told CNBC.
The list also includes a variety of interesting, less-publicized retirement plans, such as socially conscious investments for people who don’t want their money in mining or military interests — with infrastructure-funding Build America Bonds and renewable energy firms as potential options — and structured notes.
Read the full column here.
Written by Alex Spanko
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I want to say thank you to Mr. O’Dell for his disparaging comment about brokers (not). He says “Going lender direct…means very low closing costs”. Apparently, he does not realize that in return for the very low closing costs the borrower’s principal limit can be reduced by tens of thousands of dollars. There is no free lunch. As a broker, we don’t pressure our clients to do anything they do not want to do. Please stick to your field of expertise.
Mike,
Lower upfront costs generally means a higher margin but does a higher margin mean “the borrower’s principal limit can be reduced by tens of thousands of dollars?” Not necessarily. It all depends on what the expected interest rate is before and after the increase in the margin.
What a higher margin will always mean is that any accruing interest will be greater as will accruing MIP. I hope that is what you mean “by no free lunch.”
That is why I used the word “can” be reduced by tens…I recently had a client that said that he was quoted closing costs of $125.00 (counseling fee). When I looked at his comparison sheet, he had a net principal limit that was $31k less than if he paid the typical closing costs(expected rate quoted at 6.89%). And yes, the “no free lunch” means exactly that. You cannot expect to get an expected rate of 5.06% or lower and no closing costs at the same time, especially with no draw at closing. What lender would do a reverse mortgage or any mortgage, for that matter, where they didn’t receive any income?
“What lender would do a reverse mortgage or any mortgage, for that matter, where they didn’t receive any income?”
Liberty Home Equity Solutions – if the house is paid off, and all the proceeds are applied to the Credit Line, Liberty pays all fees except counseling. And the Expected is never above 5.06
Wow…they must make money on the tails? If the borrower never uses the line I guess they would suffer a loss. I guess I should have said what “broker” would do a loan that did not receive income. Thanks for the info..I did not know that.
Mike,
What do you mean by a free lunch? A free lunch has to do with either getting something that normally has a cost for nothing. It seems you are desperately trying to tie the no upfront cost HECM to a lower principal limit HECM due to a higher expected interest rate but that is not what is going on.
The difference is not simply the expected interest rate but is the margin since it affects both the note rate and the expected interest rate. If the margin rises, all ongoing costs rise. That is your “cost.” Yet there is also a possible loss in the principal limit as well.
What you are saying is if the expected interest rate goes from 4.1% to 4.9%, there is no cost to the borrower since the principal limits will be identical in either case but that is nonsense. When the expected interest rate goes up by 0.8%, what is actually going up is the margin. So if the initial interest rate was 2.02%, it now increases to 2.82% which not only increases the accruing interest each month but the accruing MIP as well.
For example say the balance due was $90,000 with no upfront costs but $100,000 with financed upfront costs. The interest on the first month on the $90,000 balance due would be $211.50 and the ongoing MIP would be $93.75. On a $100,000 balance due, the interest would be $168.33 and the MIP, $104.17. Let us assume that the average effective note interest rate was exactly equal to each initial interest rate. After 280 months, the balance due on the $90,000 beginning balance due (assuming no other payouts were taken and no pay downs were made) is $232,263 of which $43,693 is ongoing MIP and $98,579 id interest. On the $100,000 beginning balance due, the total balance due on the 280th month is $214,248 of which $43,673 is ongoing MIP and $70,575 is interest.
So you tell me, was there a cost to getting the upfront costs removed even though the principal limits were the same?
You indicate, “What you are saying is if the expected rate goes from 4.1 %…but that is nonsense.” Please tell me where did I mention those numbers? The actual expected interest rate (EIR) is determined on the date of application and then again just before closing(within 120 days). Whichever EIR gives the borrower the most benefit will be used. The goal is to keep the EIR at 5.06% or lower to give the borrower the maximum principal limit. After the loan closes, the index plus the margin plus the MIP is applied to the outstanding balance (UPB) and the available line of credit monthly, not the EIR. It is true that HUD requires the use of the EIR on the amortization schedule but it is not used in the real calculations after closing.
You indicate, “When the expected interest rate goes up by…what is actually going up is the margin.” The expected interest rate is the current margin plus the ten year swap. For most lenders, when the rate goes up (the ten year swap), the margin is decreased and vice versa, to keep the EIR at 5.06 or lower. So, it is not the margin that is going up necessarily as it is a function of the ten year swap that determines the margin (for most lenders).
You indicate outstanding balances of $90,000.00 and $100,000.00. Not sure where that came from but you state, “The interest on the first month on the $90K would be $211.50 and the interest on the $100K would be $168.33. That does not make sense.
Free Lunch – It does not require a complex formula or calculation to explain. What it means is that for most originators we make our money at the time of closing (O.K., technically after the three day right of rescission on traditional HECMs). Most of us get that from the origination fee, broker compensation, or from both for some. The borrower will have to relinquish something in exchange to do the reverse mortgage. That is what I mean by no free lunch. If you can show me how I can give my borrowers, who take no draw at closing, a no origination, no closing cost, with an expected interest rate of 5.06% or lower reverse mortgage and still be able to make a living, please show me how. I would love to do this for all of my borrowers.
Mike,
First, how you make your commission makes absolutely no difference to the borrower as long 1) the amount of the origination fee [or other upfront costs] 2) the margin or 3) choice of type of HECM are not impacted.
The EIR (Expected Interest Rate) on an HECM ARM only has two components, a margin and a 10 year LIBOR swap rate. The NIR (Note Interest Rate) on that HECM ARM also only has two components, the same margin as the EIR and either the monthly or applicable annual LIBOR index rate depending on whether the HECM ARM is annually adjusting or monthly adjusting.
If a HECM ARM is offered with upfront costs and that same HECM ARM is offered without upfront costs, normally the only difference in the two HECMs other than the initial balance due at closing is the margin. Normally the margin on the HECM ARM with upfront costs will be lower than the HECM without them; that is why the PLF (Principal Limit Factor) is generally lower with the HECM ARM with upfront costs.
If the borrower chooses the HECM without upfront costs, the margin rises as does the NIR by exactly the same amount. So over time, the growth in the balance due will be larger with the HECM ARM without upfront costs than with upfront costs; yet the offset to that higher NIR is the balance due at closing on the HECM with no upfront costs will be lower.
So the choice of upfront costs and no upfront costs is a lower or higher EIR as well as higher or lower NIRs both of which are caused by a higher or lower margin.
I recommend that instead of paying a fee to Rob O’Dell at Coyle Financial Counsel, consumers should directly purchase their financial products from the source OR better yet, work with a CFP that understands the workings of the financial world better than he does.