Finding the best deal on HECM reverse mortgage

The best deal on a mortgage is usually defined in terms of the interest rate and origination fee charged the borrower. That was my approach in a previous article on the subject. I recently realized, however, that with reverse mortgages, it was more meaningful to focus on the amounts that borrowers receive in the diverse ways in which reverse mortgages can be used. That is my approach here.

Data source

Each week, 9 reverse mortgage lenders update their prices to my web site, which is the only available source of price data covering multiple lenders. For this analysis, I assume a borrower of 64 with a house worth $400,000 in California. Five of the nine lenders operate in California, which means that the borrower has a least 5 quotes — more if any of the lenders post multiple rate/fee combinations, which most of them do. The prices are as of March 22.

Because the best deal on a reverse mortgage depends on the borrower’s objective, my approach is to look at each of 5 common objectives. In each case, I compare the largest amount offered the borrower with the smallest amount.

Raise as much cash as possible

Many reverse mortgage borrowers have an immediate need for cash, which may be to pay off a short-term debt or buy a house. In contrast to other objectives discussed below, which can be met only with adjustable rate HECMs, this one can be met with a fixed rate or an adjustable rate HECM.

Using a fixed-rate, the largest amount available on March 22 was $100,225 from lender A, the smallest was $83,995 from lender D. The smallest quote was 84% of the largest.

Using an adjustable rate and including amounts that can be drawn after a year, the largest amount was $180,595 from lender C, the smallest amount was $143,594 from lender E. The smallest quote was 80% of the largest.

Obtain the largest possible future credit line

At the opposite extreme from the previous case, some borrowers have no immediate financial needs, but want a rising credit line. A credit line can be used at any time to generate additional income and/or to meet unexpected contingencies. I compare the lines offered by the five lenders in 10 years based on their interest rate quotes on March 22.

Lender C provided the largest line in 10 years of $267,454. Lender E offered the smallest at $232,912. The smallest was 87% of the largest.

Obtain the largest possible tenure payment

A tenure payment is a monthly payment for as long as the borrower resides in the house. Lender B paid the most at $830 while lender E paid the least at $803. The smallest was 97 percent of the largest. Right now I don’t know why the spread on tenure payments is much smaller than on other HECM uses.

Obtain the largest possible payment for 5 years

A borrower can draw a larger amount for a shorter period. If that period is 5 years, he could draw $3,285 from lender C or $2,745 from lender E. The smallest was 84 percent of the largest.

Obtain the largest possible credit line with a cash draw of $25,000

Many borrowers use reverse mortgages for multiple purposes. For example, the borrower might need $25,000 in cash and want the balance in a credit line on which she can draw at any time. That line would be $75,079 if obtained from lender C but only $55,819 if obtained from lender E. The smallest was 74% of the largest.

Implications for borrowers

The differences in the amounts offered by the different lenders on my site understate the differences that exist in the market as a whole. The lenders on my site know they are being comparison-shopped. Further, none of them are among those that spend large amounts on merchandising that have to be recovered by offering poorer terms to borrowers. Over the market as a whole, the smallest amounts offered could be well below those on my site.

None of the five lenders in these comparisons offered the best deal in every transaction, and none offered the worst deal in every transaction. That means that I can’t advise borrowers to seek out a particular lender, or avoid a particular lender. The only valid advice is to seek out the lender who offers the best deal on your particular transaction. This is very easy to do on my site, but very difficult otherwise.

Implications for policy

If HUD had an interest in assuring that senior homeowners received the largest possible benefit from the Federally-supported HECM program, it would certify multi-lender sites that make it easy for seniors to find the best available deal.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.