The Department of Housing and Urban Development’s latest changes to the reverse mortgage program have given rise to yet another “new” reverse mortgage — one with lower interest rates and ongoing insurance premiums that enable borrowers to preserve more of the equity in their homes.
Some originators say the revised program amounts to a better deal for consumers, and that reverse mortgages will now align better with traditional mortgage offerings, like the home equity line of credit. But the new rules will likely drive closing costs higher, creating a stumbling block for consumers that originators will need to overcome.
Attracting HELOC borrowers
Compared with the Home Equity Conversion Mortgage, which had just 56,864 endorsements in calendar 2017, the HELOC market is massive and is expected to grow as home prices continue to rise. TransUnion predicts that approximately 10 million people will take out HELOCs in the next five years — more than double the number originated from 2012 to 2016.
Reverse originators have long discussed how the industry can attract would-be HELOC borrowers, educating them on how a HECM can be a far better deal for the over-62 set. With new rules driving down interest rates and lowering ongoing costs, some say the HECM is better poised than ever to make its case.
Still, HECMs have traditionally been more expensive than HELOCs, and the latest changes will likely push closing costs even higher by instituting a flat 2% upfront mortgage insurance premium — diminishing a lender’s ability to offer credits and encouraging the return of origination fees.
Unmatched benefits for the long term
With the upfront expense involved, the HECM makes the most sense for those seeking long-term financing.
Jim Cory with Live Well Financial says the cost of taking the loan is nominal if you consider the benefits over time.
“I look at it as a long-term program and closing costs over time aren’t that much… 10 years into it, $15,000 in closing costs is nothing. And, under the new program, you’re going to be in a much, much better equity position than before even though you’ve been using it,” Cory says.
Patty Wills of Open Mortgage says highlighting the unique benefits of the HECM can help overcome concerns about the initial expense.
“For a forward thinker, it’s worth the additional upfront cost of the HECM line of credit, because of the security the HECM offers,” Wills says. “That line of credit is going to increase over time, creating a larger source of funds for the future. And the HECM line of credit can’t be withdrawn or frozen by a lender because of credit, income, or because their home value went down. That actually happens with standard HELOCs all the time, and it can create a crisis.”
Sue Haviland with TowneBank Mortgage also points to several features of the HECM line of credit that aren’t available with a HELOC.
“Even though the rate of growth is not what it was in the recent past, the growth is still there on a HECM line of credit, unlike a regular HELOC. And there’s no set draw period, whereas on a traditional HELOC the borrower can generally draw for a number of years and then it automatically converts to a repayment status,” she says. “I think it’s a superior choice for the borrower who is planning for the long term.”
Wills says the HECM provides an unmatched sense of security, and this makes it an excellent product for those seeking financing in retirement.
“The HECM is designed for people over 62. It’s designed for security and for use when income is not necessarily going up. The HELOC is designed for someone whose income will increase in the future, so they’re going to borrow a little now, and as their income goes up, they’ll pay more and pay off their line of credit,” Willis says. “But that’s not what you need in retirement; what you need in retirement is the HECM, because the HECM gives you the security moving forward.”
Spreading the word
Originators agree that getting consumers to understand how a HECM could be a better choice will take considerable effort.
“The key is to continue to educate the public in whatever way we can,” Haviland says. “I personally still think that face-to-face meetings are key when explaining the benefits of the product, especially when you’re comparing it to something else. You’ve got to address the borrowers’ questions directly and help them see the benefits over the long term.”
Wills says the industry needs to change its message, moving away from the HECM as a solution to a specific problem and instead highlighting its importance for anyone considering a loan in their later years.
“Our message needs to be, ‘If you’re over 62 and you’re looking at any kind of home financing, you need to look at the HECM.’”
Written by Jessica Guerin