You can if you know exactly what you want, and exactly where
to find it. This article is designed to help.
Step 1 is to rid yourself of the notion that in shopping for
a reverse mortgage, the target shopping variables are the
interest rate and upfront lender fees. We have all been
conditioned to think that way by our experience in the
standard mortgage market. The standard mortgage calculator
on my web site encourages potential borrowers to find the
best price from competing lenders by taking the same rate
for each one and comparing their fees. If 5 lenders all
quote a rate of 4%, the one with the lowest fees is the best
deal. This process is facilitated by the practice of
denoting rates in even multiples of 1/8%, as in 4%, 4 1/8%,
4 ¼%, 4 3/8% and so on.
This doesn’t work in the reverse mortgage market, where
lenders do not adhere to the 1/8% rule, and one sees such
rates as 4.99% and 3.23%. But even if lenders used the 1/8%
rule, borrowers would not be able to find the best deal by
shopping rate and fees, for a more fundamental reason. In
the standard market where borrowers use mortgages only to
purchase houses, higher rates and larger fees always reduce
their ability to pay, so they naturally look for the lowest
rate and fees. Borrowers in the reverse mortgage market,
in contrast, use the mortgage for a wide variety of
purposes, which are affected in different ways by rates and
fees. For example, some reverse mortgage borrowers do better
with higher interest rates!
Bottom line, the shopping variables on which a reverse
mortgage borrower should focus depends on her objectives. I
am going to illustrate that in connection with two
objectives that I have written about in recent weeks:
purchasing a house and replenishing a loss of income
expected in the future.
In purchasing a house with a HECM reverse mortgage, the
objective of some borrowers is to minimize their cash outlay
at the closing. Their shopping variable is the largest
upfront cash draw. Other homebuyers with more flexibility in
their finances will aim to minimize their cash outlay within
the first year of their purchase. Their shopping variable,
therefore, is the largest total cash draw available in the
first year.
While the interest rate and origination fees affect the cash
draws, the selection decision ignores them. There is no way
for a shopper to know whether a quote of 4% plus $1500 will
provide a larger cash draw than 3.5% plus $3500. In this
case, the role of the price quote is to identify the loan
that provides the largest cash draw.
The reverse mortgage borrower who wants to lay the
groundwork now for replenishing her income X years in the
future when she expects her income to drop, has a very
different shopping variable. Her interest is in obtaining
the largest monthly tenure payment – a payment that will
continue for as long as she resides in her house – beginning
in X years. That could be the loan with the highest interest
rate, but that is not relevant. This borrower should shop
for the largest tenure payment available after X years, with
the rate and lender fees merely identifying the loan that
meets that objective.
These examples do not exhaust the list of reverse mortgage
objectives and their shopping variables – there are at least
8 more, which I will write about at another time.
Every reverse mortgage transaction involves the creation of
a debt secured by the borrower’s home, which grows over
time. That debt must be repaid from the proceeds of the sale
of the home when the borrower dies or moves out. Only
the amount remaining after the debt repayment is remitted to
the heirs.
Some borrowers are concerned about that and want to leave as
much house equity to their estate as possible. In that case,
future debt, or estimated future debt if the reverse
mortgage is adjustable rate, is a shopping variable that the
borrower must balance against the other shopping variables.
Borrowers who have no heirs or whose heirs have no need for
the equity in the borrower’s home, can ignore future debt.
One way is to shop individual lenders. You can’t do that
on-line, however, because the information is not on their
web sites. You will have to contact each lender directly and
request the information, which they will probably provide
only through direct contact with a loan officer whose
mission is to sign you up as a customer. This will be a
grueling and time-consuming process.
The alternative is to use my kosher reverse mortgage
calculator, which does show the variables relevant to your
objective, for each of the 9 reverse mortgage lenders who
deliver their price quotes to my site. None of them will
contact you unless you contact them first.