Why New Forward Mortgages Present Unique Problems for Seniors

Despite some prospective borrowers resisting the initial mention of a reverse mortgage and seeking instead to get a new forward loan, being able to position the reverse relative to the forward can be a valid selling point for originators. For those seniors who have an aversion to a reverse mortgage, employing a new forward mortgage can present a series of major complications for the senior demographic who may not be aware of the advantages a reverse mortgage could offer them.

These difficulties can come from a number of places including the inherent design of the traditional forward mortgage product, along with the financial realities facing a senior that forward mortgages often do not address.

Traditional mortgages ‘were never meant’ for seniors

One of the reasons that the creation of a forward mortgage is unproductive for seniors is that it creates difficulty in retirement, since a forward mortgage constitutes a significant monthly expense that has a disruptive impact on people who have a fixed income. This is according to Martin Andelman, reverse mortgage trainer and speaker with HighTechLending in Orange, Calif.

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“My father taught me a lot of things, but one thing he never taught me was that it gets a lot harder as you get older,” Andelman told RMD on a recent episode of The RMD Podcast. “I didn’t know that, I thought it got easier for some reason. Now, I realize I was an idiot for thinking that. It gets much more difficult as time goes on, not easier. People in retirement know that, and you can’t retire with a mortgage. If you show me someone with a mortgage, I’ll show you somebody who’s still working somewhere.”

The terms associated with a new, 30-year mortgage also create additional complications for someone who is advanced in age, and much of that is because traditional mortgages were never designed with seniors in mind, Andelman says.

“It’s also worth mentioning that [in terms of] 30-year mortgages, I promise you, no one ever sat around and talked about 30-year mortgages thinking they’d be perfect for 70 and 80-year olds,” he says. “30-year mortgages were never meant to be for them. And now, I bump into people all the time who could be 72 years old, just refinanced two years ago, and now has only 28 years to go. What could go wrong?”

Beneficial and basic reverse mortgage knowledge

For seniors finding themselves in a situation that would require some kind of mortgage-based solution, the reverse is often thought of last, or is not thought of at all says Christina Harmes, assistant manager of the C2 Reverse Division of C2 Financial Corp in San Diego, Calif.

“I’ve seen many situations where a forward mortgage loan officer and the borrower themselves have many misconceptions about reverse mortgages, so they didn’t even look into it as an option to compare with other choices,” Harmes tells RMD. “This is where the knowledgeable mortgage broker can shed light on the realities of how a reverse mortgage works, and how it could have a life-changing impact.”

Reverse mortgage vs. HELOC, forward refinance

Harmes’ company, C2 Financial Corp, advocates for its forward mortgage loan officers to have a basic knowledge of reverse mortgages, so that in situations where it may be a better fit, it’s an option that can be raised and considered, Harmes says. She also finds other situations in which an older homeowner refinances into a lower-rate 30-year fixed forward mortgage, but realizes later that a lower monthly payment didn’t help as much with cash flow as they may have thought.

“Had they done the reverse instead of a forward refi or Home Equity Line of Credit (HELOC), they could have saved themselves the hassle and two refinances, paying double the closing costs and likely could’ve experienced improved cash flow along the way,” Harmes says. “If they had instead done a reverse mortgage while making payments on the reverse, then when things get tight they can skip a payment or just stop making the payments altogether when they are ready, without any refinance necessary.”

Identifying a place for reverse

As more seniors are confronted with the necessity to make ends meet in retirement, having greater awareness of the function that a reverse mortgage can serve in an overall financial plan can be an important idea for general mortgage originators and brokers to be aware of, according to Harmes.

“When an older homeowner asks their long-time mortgage broker about refinancing, it’s becoming more and more important that the loan officer can identify when a reverse could be an option and let their client know,” she says. “And better yet, if they know what they are doing to actually show the reverse option right alongside the forward options.”

Reverse PLFs and paying off a forward mortgage

This can be especially important for a rate-sensitive senior who, after getting a product alternative to a reverse mortgage, may not have enough proceeds to draw from in paying off a forward mortgage.

“When older homeowners do a cash out refinance or a HELOC, then look into a reverse, often the reverse mortgage principal limit factor (PLF) is lower than it is on the forward mortgage (and/or HELOC) they need to pay off,” Harmes says. “Unless they have the cash elsewhere to help pay down the existing mortgage in order to do the reverse, they can end up financially stuck. This is a heartbreaking situation for someone who wants to remain in their home.”

In the end, this illustrates a necessity on the part of the loan officer or financial advisor to explore all the available options upfront, Harmes adds.

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