A reverse mortgage has never been a one-size-fits-all solution. For some borrowers it helps bridge a specific financial gap; for others its a means of eliminating a monthly mortgage payment. Still for others, it’s a rainy day fund that can cover unexpected expenses.
But there are other common problems a Home Equity Conversion Mortgage can solve, and there should be a strong value perceived among prospective borrowers, says Craig Barnes, corporate trainer for Reverse Mortgage Funding. This should lead borrowers to recognize the loan as a premium product.
“If we perceive value in something—a better brand of clothing, a type of car, food or cell phone plan—we are usually willing to pay more for it,” Barnes said during a presentation during the National Reverse Mortgage Lenders Association Western Annual Meeting in Huntington Beach, Calif. this week. “But have we ever thought about paying more for a mortgage product where the line of credit grows, monthly principal and interest payments are not required, you never have to pay back more than the home value and it’s government insured?”
By selling HECMs as a solution and solving a specific need, originators can position reverse mortgages as a premium product for borrowers who might otherwise question the closing costs or other fees that are commonly associated with the loans.
Barnes points to several common problems and the solutions that a premium reverse mortgage product can provide.
Problem: Lingering credit card debt
“Baby boomers are much more comfortable with credit cards than their parents,” Barnes said. “They have had mortgages, they have refinanced, they have had installment debt and they have credit card debt. This is something they have right now.”
By allowing borrowers to withdraw cash from their home equity, a reverse mortgage can help pay off the debt in full, or it can provide monthly payments to help pay off the debt over time.
As an additional tip, Barnes recommends pulling all borrower credit early in the application process to get an understanding of what the debt looks like, and how a reverse mortgage may serve a purpose the prospect may not have considered initially.
“When you pull their credit, explain how [a reverse mortgage] can help pay off this card or that card and free up extra money every month,” he says.
Problem: Mortgage payments too high
For borrowers who have mortgage payments that are unsustainable in retirement, Barnes recommends showing the comparison between a HECM and a traditional refinance transaction. While the closing costs may be comparably high for a HECM loan, the originator can look to the expected rate, origination fee or possible credits to reduce the costs.
“Maybe you can get it lowered, or reduced to zero,” Barnes says.
Problem: HELOC shock
Many baby boomers took out home equity lines of credits during the pre-recession era around 10 years ago. Many of those borrowers will see increased payments in the coming months and years.
“Does your potential borrower have an extra $385 per month?” Barnes says. That’s where the concern is.” Originators can look to this potential pain point as a place to provide a solution.
“If cash is available, it may be able to pay off the HELOC balance,” he says.
In some cases, a HECM can solve multiple problems at once. Barnes recounts the story of one borrower in his experience who had four needs resolved with a HECM. The 71-year-old borrower wanted to eliminate her monthly principal and interest payments, pay off credit card debt, get supplemental income and set up a nest egg.
“A HECM did it all,” Barnes says. “This was an actual borrower.”
Written by Elizabeth Ecker