I know this announcement is a little late. But we are now fully stocked with updated 2025 editions of all five books we offer. Each new edition incorporates all the latest industry changes, regulations, and guidelines to ensure you have the most current information at your fingertips.
Understanding Reverse was updated to reflect regulatory changes and to make minor changes to the text. For instance, we have expanded the PLF tables to display a wider range of anticipated interest rates. In all, there were 24 rather insignificant changes this year.
Navigating Reverse is ideal for existing borrowers, surviving spouses, and heirs. This book received an overhaul at the end of 2024 that included a new chapter on Cash for Keys and another on Preventing Fraud and Exploitation. The most difficult changes were converting the regulatory references to the updated HUD Handbook 4000.1.
Remember, these two books are updated annually. By ordering early in the year, you’ll maximize the utility of your investment and avoid holding inventory when the books change for 2026.
What is the Branded Book option?
We want broader distribution of reverse mortgage content and a greater impact for sales professionals. So, if you wish to have custom covers for either Understanding Reverse or Navigating Reverse, we are once again offering options for branded copies.
The purpose is to brand books that promote YOU when you provide Understanding Reverse as a marketing initiative or Navigating Reverse at closings. If you want to discuss Branded Books for your company or team, please reach out to me directly at [email protected].
How to order
Bulk orders are available using the STORE link above. This is a much less expensive option, but we do require a minimum order of 10 copies. Therefore, if you only need a copy or two, you can order both paperback and eBook formats through Amazon here: Understanding Reverse and Navigating Reverse. And remember, we always pay shipping and handling charges.
Home Equity Conversion Mortgages (HECMs) are the only federally insured reverse mortgages in the U.S. One reason for their popularity is that the mortgage terms are what most would consider advantageous, or at least reasonable.
It’s hard to say what is reasonable at a time when revolving credit card interest rates average 20% or more. Nevertheless, HECM interest rates should be high. After all, the HECM is a non-recourse loan that doesn’t require a regular monthly principal and interest mortgage payment. Combine that with a maturity date of age 150. Surely that must require higher rates, right?
Don’t forget that Dave Ramsey tells us repeatedly that reverse mortgage “interest rates are double” 1 and that the terms are punitive, designed to prey on the elderly.
“The interest rates that reverse mortgages are calculated on are almost double what traditional interest rates are on a mortgage.” 2Dave Ramsey
Dave even encouraged a listener to get his mother-in-law, caring for her husband with dementia, to refinance out of their reverse mortgage. His advice was to “just go get a [traditional] $200,000 loan… 15 years at 6 percent because [the borrowers] are probably being charged 10 or 12 [percent].”3
Bankrate and AARP take a more subdued stance, stating that “the interest rates on reverse mortgages vary by lender, but tend to be higher compared to a regular mortgage” 4 and “reverse mortgage interest rates tend to be a bit higher than rates for home equity loans or home equity lines of credit.” 5
Strange. I’ve been writing and speaking on the topic of home equity conversion for 16 years, and these criticisms do NOT reflect my experience.
I’ve generally taught that HECM interest rates will follow interest rates offered with a 30-year fixed-rate conforming mortgage.
Words matter, and so do numbers. So, I set out to find the truth.
Pulling numbers from multiple sources, I was able to compare prevailing interest rates over the last five years for HECMs, the 30-yr fixed-rate mortgage, and even estimated HELOC rates (based on Prime plus 0.75%). While all three rates were on a turbulent ride, HECMs came out the winner, as you can see here:
Product
Average (1/1/20 – 10/31/24)
HECM
4.889%
30-YR FRM
5.017%
HELOC (Est.)
6.309%
I’ll leave the analytics to the statisticians, but I believe it’s fair to say that HECMs tend to follow, and are strongly correlated to, the 30-year fixed-rate mortgage. In addition, they are significantly lower than HELOCs.
To learn more about reverse mortgages, please pick up a new (2025) copy of Understanding Reverse.
The TALC is a reverse mortgage disclosure that not only satisfies federal Truth in Lending Act (TILA) requirements, but it also tells a powerful reverse mortgage story. It demonstrates that the longer the borrower lives in the home, the lower the annual cost of a reverse mortgage because the upfront costs are spread out over more years.
Most loans disclose an Annual Percentage Rate (APR). However, that’s not possible with a HECM because it has no reasonable, or predictable, ending date (term). Instead, it has a due date of the youngest borrower’s 150th birthday, and we know that’s no basis for calculating an APR.
Why is the TALC expressed as a table?
With a reverse mortgage, we don’t know 1) the loan term or 2) the home appreciation rate over time. Therefore, a table is required to show multiple combinations of each.
When you view the TALC, you will generally see combinations of four loan terms and three appreciation rates. This gives the borrower an idea of the short- and long-term costs of the product.
TERM: The TALC will generally show the following four time periods: 2 years, half life expectancy, life expectancy, and 1.4 times life expectancy
APPRECIATION: The TALC will show three home appreciation rates: 0%, 4%, 8%.
Note that home appreciation is important because non-recourse loans with little or no home appreciation could have a portion of the loan balance forgiven (if the loan balance exceeds the home’s value). This would reduce the total cost to the consumer.
Why is 93% of home value listed in every TALC disclosure?
When calculating a TALC, we need to know what the homeowner would hypothetically net in a sale. The Truth in Lending Act requires that IF the amount required to be repaid is limited to the net proceeds of a sale, then we must consider the costs of that sale. This portion of the disclosure became federal law as per 12 CFR Appendix K to Part 1026.
How do we calculate the percentages shown on the TALC?
The calculation is somewhat complex. But if you are into that sort of thing, the computations related to this disclosure are found here. In layman’s terms, the TALC considers ALL the costs of the mortgage, including closing costs, out-of-pocket costs, mortgage insurance, interest, and more before expressing those costs as an annual rate.
How do we explain the TALC to a client?
Sometimes, using extremes to explain the TALC is the most effective approach. For example, let’s assume the client obtains a reverse mortgage and sells the home the next week. That would be an extremely expensive transaction with a very high TALC rate because the costs don’t justify the short-term benefit. This phenomenon is not unique to reverse mortgages. Even traditional loans with upfront costs can be expensive if used for short-term financing.
By contrast, if the client lives in the home for another 40 years or more, the upfront costs are insignificant considering the long-term benefit, and the TALC rate could be lower than the loan note rate.
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
For homeowners age 62 and older, the federally insured Home Equity Conversion Mortgage (HECM) is the most common reverse mortgage product. Over the last 15 years, the HECM has undergone significant changes, becoming a popular tool for retirees seeking assistance with cash flow, liquidity, tax planning, and even enhancing their net worth. However, the greatest potential impact of a HECM right now might be debt consolidation.
Debt consolidation is a financial strategy that combines multiple debts into a single loan, often with better terms like lower interest rates or lower payments. This can make debt management easier, reduce the risk of default, and ultimately save the borrower money.
HECMDebt Consolidation (HDC) uses a reverse mortgage to leverage housing wealth to pay off existing mortgages, liens against the property, installment debt (such as car loans), and revolving consumer debt (such as credit cards). You can consolidate all these debts into a single loan without a required monthly principal or interest mortgage payment. Simply occupy the house and pay all property-related charges, such as taxes and insurance. The amount that is drawn, plus interest, is generally paid off when the home sells in the future.
Note: The HECM is not able to pay off consumer debt directly at closing. Rather, it provides the cash proceeds for those payoffs. Other products known as “proprietary reverse mortgages” may pay the debts directly when the loan funds.
THE TIME IS NOW!
During the Federal stimulus response to COVID-19, consumer debt decreased, and personal savings rates increased. 1 However, that relief was temporary, as shown below:
The bad news is that consumers are taking on too much debt and not saving enough. Over the last 10 years, consumer revolving debt has increased by over 77%, while the personal savings rate has decreased by over 44%. The good news for older homeowners is that home values have appreciated an average of 106% over the last 10 years. 2 There has never been a better time for an HDC.
BASELESS CONCERNS
Foreclosure: According to conventional wisdom, this strategy increases the risk of foreclosure. Even the Consumer Financial Protection Bureau (CFPB) discourages reverse mortgages for this very reason. However, there is a clear reduction in the risk of foreclosure.
The primary reason for home foreclosures is non-payment (e.g., mortgage payment or property tax payment). But remember, the reverse mortgage does not require monthly principal or interest payments. Furthermore, the elimination of consumer debt makes it easier to pay critical payments like property taxes.
Debt: Dave Ramsey supporters steer clear of this strategy because they view mortgages as debt instruments and believe that “all debt is bad.” However, the math is clear: the Ramsey “debt snowball” process is terribly inefficient when paying revolving debt interest rates of 20–30% while making a required monthly mortgage payment. In as little as 30 days, a properly trained mortgage professional could complete the debt snowball process (which takes Ramsey followers years to complete).
WHY NOT CASH-OUT REFINANCE?
Traditional (forward) debt consolidation loans may not work in today’s higher interest rate environment. It may be risky to double a homeowner’s mortgage rate to pay off revolving debt, such as credit cards. Even if the weighted average interest rate (blended rate) decreases, this might not make sense for the following reasons:
It converts unsecured debt into secured debt (your home).
It increases your monthly mortgage payment.
Non-payment of a mortgage often results in foreclosure.
Homeowners who implement my HDC strategy are thrilled to have a mortgage without a monthly bill. If, however, the homeowner is concerned about interest accruals on their monthly statement, they can make optional payments whenever they wish in coordination with their tax planning. The HECM product offers an advantage in that voluntary payments not only lower the loan balance but also expand the available credit line for future use.
In today’s high-rate environment, a reverse mortgage should be used for a wide spectrum of financial planning purposes, like tax strategies, ROTH conversions, Social Security filing decisions, long-term care planning, portfolio optimization, and yes, debt consolidation. But to prevent consumer debt from accumulating again, an HDC requires discipline and a solid plan.
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
“If I’m able to pay off your existing mortgage and eliminate your required monthly principal and interest debt payments, what would you do with an additional $3,000 each month?”
A mortgage professional recently posed this question to their retired client. Sure, traditional debt consolidation can provide you with more cash flow. But $3,000? Surprisingly, this is not uncommon when a properly-trained reverse mortgage professional works with a homeowner and their trusted advisor.
The Urban Institute estimates that 38% of homeowners between the ages of 65 and 74 are paying off housing-related debt. Furthermore, over 30% of homeowners who are age 75 or older are still making a monthly mortgage payment. Sadly, most of them are unaware that the federally insured reverse mortgage product known as a Home Equity Conversion Mortgage, or HECM, is a safe and effective alternative.
Reverse mortgages, specifically HECMs, allow homeowners aged 62 and older to utilize a percentage of their home’s value to pay off existing mortgages and convert the remaining proceeds into cash or a growing line-of-credit (LOC). Keep in mind that reverse mortgages do not require a monthly payment, but the homeowner must occupy and maintain the home and pay all property charges, such as taxes and insurance.
CARL AND CATHY’S STATUS
Consider Carl and Cathy, who have no cash flow in retirement. With a quick look at their credit report, we can see the obvious reason: their combined mortgage debt, revolving debt, and installment debt require monthly payments totaling $3,000, as shown here:
If you call Dave Ramsey for help, his inappropriate solutions for retirees have been repeated for years: “Go back to work, sell your car and buy a beater, eat rice and beans today and beans and rice tomorrow, and sell the house.” Then, and only then, Carl and Cathy can implement a debt snowball strategy over the next 10 years. Will they celebrate their financial freedom at age 80? Maybe, but they may not be able to enjoy their eventual cash flow in their later years. Under a debt snowball strategy, Carl and Cathy might become debt-free, but they might find themselves back to work and renting a 1-bedroom apartment, or living with their daughter, Christine.
Sadly, non-credentialed financial pundits like Ramsey don’t bother to ask two critical questions: 1) How old are you? and 2) What is the estimated value of your home?
CARL AND CATHY’S HECM SOLUTION
Carl and Cathy are both age 70, with a home value over $1 million. With the help of a competent HECM specialist, Carl and Cathy can easily solve their cash flow problem in as little as 30 days.
The HECM can pay off the traditional mortgage, pay the closing costs, provide cash proceeds to eliminate consumer debt, and establish a growing line-of-credit (LOC) for future needs. And remember, there are no required monthly principal and interest mortgage payments to make, as shown here:
NOW WHAT?
Carl and Cathy eliminated $3,000 in monthly payments and paid off their revolving debt and installment debt. They even established an emergency fund (LOC). Where they go from here is up to Carl and Cathy, under the guidance of their CPA and/or financial planner. Here are common pathways homeowners take:
Reduce draws from IRA and 401k. Stop drawing so much from retirement savings and ensure those funds last a lifetime.
Plan for long-term care. 70% of us will need it. Nevertheless, many don’t plan for it because of a lack of cash flow.
Optimize life insurance needs. Your financial planner and/or insurance professional will have an opinion on insurance needs.
Complete home improvements. Don’t defer maintenance any longer. Ensure your home will allow you to age-in-place.
Pay down the HECM. Make voluntary payments? Sure. Reduce your loan balance, increase your LOC, and create a potential tax advantage.
Enjoy life and Travel. Live your best life now. Do you want to see family members or get away from family members? It’s your choice.
Assist kids and grandkids. Family members may be struggling with student loan debt or finding it challenging to purchase their own home.
Consider charitable giving. When there is no cash flow, giving can be very challenging. So, let’s create cash flow.
Of course, we don’t want to see homeowners spend their new-found cash flow irresponsibly. However, the HECM creates cash flow, liquidity, and peace of mind that should not be ignored by any financial services professional.
For more information on strategic uses of reverse mortgage and their guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
Understanding Reverse has been updated for 2024 and is now available on Amazon and discounted through the Understanding Reverse store. We apologize for the delay, but updating this 10th edition had many challenges.
You may notice some changes
First, you’ll notice the cover has changed. Not only has the LOGO been simplified for branding purposes, but there is also no YEAR listed on the cover. Why? Because future editions of each book will be “revisions” for Amazon’s purposes. They will simply contain updated content, and you will no longer need to worry if you are buying the most updated version.
Next, you’ll see that the back cover will be the same for both Amazon and website purchases of the book. If you like to insert marketing stickers or business card sleeves, there is still room for that on the inside front cover.
If you wish to have custom covers for either Understanding Reverse or Navigating Reverse, we are now offering branded copies on larger print runs (see Branded Books below).
You’ll also notice new content, including:
A new chapter on HECM vs. HELOC
Updated Cash for Keys guidelines effective 3/25/24
Changes to expected interest rate locking and extensions
The $20 maximum charge for a change of payment plan
Warnings about repair rider deadlines
Updated HECM for Purchase examples (Upsize/Downsize figures)
Updated occupancy certification options
An explanation of the first and second security instruments
Lastly, the most challenging part of this year’s updates were the regulatory references. Most of the references in the book had to switch from those pointing to mortgagee letters (ML) and the Code of Federal Regulations (CFR) to the newly updated HUD Handbook 4000.1.
What is the Branded Book option?
We want broader distribution of the books and a greater impact for our valued partners. Therefore, we are branding books that promote YOU when you provide Understanding Reverse for education, sales, and marketing initiatives and Navigating Reverse at closing for borrowers, spouses, and their heirs.
White-labeling is important not just for the marketing value but also for compliance reasons. In addition to marketing your firm, loan originators can also market themselves while paying the same wholesale cost generally paid for these books.
How to order
If you are ordering individual copies, you can easily do that on Amazonin both paperback and eBook formats. If you are purchasing in bulk, paperbacks can be purchase at a significant discount through Understanding Reverse. As always, we pay shipping and handling charges.
If you want to discuss Branded Books for your firm, please reach out to me directly at [email protected].
Older homeowners often look to a traditional Home Equity Line of Credit (HELOC) to pay for unexpected expenses. If the homeowner has good income and credit, a HELOC should be easy to obtain from a local bank or credit union.
For younger homeowners looking for short-term financing, a HELOC might be a good fit. Maybe they need a new roof, a home addition, or an upgrade. Maybe they wish to pay for a child’s education or a trip to Europe. If they have the ability and desire to pay off the loan quickly, a HELOC may be a good choice.
Many advisors mistakenly recommend HELOCs to older homeowners because it is less expensive than the federally insured reverse mortgage known as a Home Equity Conversion Mortgage (HECM). However, traditional financing is generally not a good idea for retirees on a fixed income, and I would consider both cash-out refinances and HELOCs to be risky options.
There is no doubt that the HELOC is less expensive upfront. However, one should not compare the costs without also considering the incremental advantages one receives from a financial product. With a HELOC, you get what you pay for, and the typical retiree would be better served by a HECM which offers a secure and growing line of credit (LOC).
Here are four reasons why a HECM is superior to a HELOC:
1. FLEXIBILITY
The HECM has no required monthly principal and interest mortgage payment. This flexibility is critical as the borrower ages. Ultimately, the required payments of a traditional HELOC harm retirement cash flow and could risk foreclosure.
2. RELIABILITY
The HECM is not frozen, reduced, or cancelled if the loan is in good standing. Will the funds from a HELOC be there when you need them? Maybe not. Traditional credit lines are often frozen or cancelled during market downturns.
3. VIABILITY
The HECM line of credit (in good standing) is available until the youngest borrower’s 150th birthday if they were to live that long. A typical HELOC has a draw period of 10 years when the loan will amortize or balloon which can put the borrower’s cash flow at risk.
4. GROWTH
The HECM has an available line of credit that grows organically at the same compounding rate applied to the loan balance. This growth feature increases borrowing capacity as the borrower ages. By contrast, a HELOC draw period is limited and has no growth element as shown below.
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
While single copies have been available at Amazon.com, we have now stocked the same copies on our STOREfor bulk orders (10 or more) at discounted prices.
The pitfalls that current borrowers, surviving spouses, and heirs may encounter have never before been the subject of a book. And we know that bad experiences invariably occur when these individuals don’t understand the nuances of the product later in the life of the loan.
Navigating Reverse was written to solve these problems so that homeowners and their loved ones have the best possible experience with this great product.
The U.S. Department of Housing and Urban Development (HUD) saw the need for this content when the agency asked this valid question in 2017:
“What difficulties have Non-Borrowing Spouses, heirs, and successors in interest had in obtaining information about HECMs and understanding and exercising their rights?”– 2017 HECM Final Rule
The comments that followed were the genesis of this book. The HECM product is an outstanding financial tool, but the confusion we’ve seen in subsequent years is undeniable. Consider some of the industry issues that could’ve been solved with proper guidance:
Non-borrowing spouses were largely unaware they may be able to remain in the home after the death or incapacity of the borrowing spouse.
Heirs were added to the title prior to the death of their parent, not knowing that action could create problems.
Borrowers were concerned about the security of their reverse mortgage proceeds after their lender file for bankruptcy.
Borrowers and their advisors were confused about their rights and responsibilities after their homes were damaged by natural disasters.
I wrote Navigating Reverse to address these issues and 65 more in the same easy-to-read format as Understanding Reverse. We all need common-sense explanations of the features, terms, rights, responsibilities, and strategies. To accomplish this, I set out to write this book with two standards in mind:
Answer each question concisely on one page, and
Document the regulatory sources for as many answers as possible.
Whether you are a mortgage professional, an existing borrower, or a borrower’s trusted advisor, my sincere hope is that Navigating Reverse will create the most positive outcomes for you as you navigate a reverse mortgage.
The federally insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), allows the homeowner to retain ownership of the home through the life of the loan. Then, after the last borrower’s death, the heirs can sell the home and recover the equity – the difference between the value of the home and what the homeowner borrowed.
What if there is no equity?
With older HECM loans, there may be no economic benefit to selling the home, refinancing the loan balance, or paying off the reverse mortgage. This is because more money was borrowed over time than the current market value of the home.
Fortunately, neither the borrower nor their heirs are responsible for any deficiency caused by the loan balance exceeding the property’s value. This is because the HECM is a “non-recourse” loan; the borrower and their heirs have no personal liability for the loan balance.
In such cases, HUD allows the borrower or their heirs to dispose of a property by completing and signing a deed in lieu of foreclosure (DIL). This document transfers ownership to the lender or to HUD, who then sells the home, generally at a loss. Borrowers and heirs have historically been unaware of the DIL option, so it is rarely used.
Existing Cash for Keys
In 2017, HUD authorized lenders to give a financial incentive for a signed DIL.1 Lenders would be able to offer up to $3,000 to parties with legal authority to sign a DIL and hand over the keys to a clean (“broom-swept”) home within 6 months of the loan being called due.2 This incentive can also be given to a tenant who must vacate the property following a foreclosure.3
Unfortunately, the current cash for keys program was only implemented for new loans—HECM loans with FHA case numbers assigned on or after September 19, 2017. And as we know, property values for those loans have risen dramatically since then. Few homeowners or heirs would consider giving away equity with a DIL, and so the Cash for Keys program has been rarely used.
New Cash for Keys
HUD recently updated their Cash for Keys program,4 upping the ante, so to speak. I see the revised guidelines as significant improvements and represent much-needed changes to the HECM program. Notable enhancements include:
Availability for HECM loans with case numbers assigned prior to 9/19/2017
Incentives for Short Sales as well as DIL and Post-Foreclosure Evictions
Incentives for up to 547 days after the due and payable date
Incentives as high as $7,500, plus probate costs not to exceed $5,000
The maximum incentive amount HUD will reimburse will be based on both the incentive type and time frame. I believe these changes, when they become effective on 3/25/24, will finally have the intended impact we wanted from a Cash for Keys program. These impacts may include:
Reducing the number of unnecessary foreclosures associated with HECM lending
Preventing unnecessary costs to the FHA Mutual Mortgage Insurance Fund
Improving public perception issues related to communities with vacant and unkept properties
Improving public perception issues related to borrowers, their heirs, and future HECM prospects
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
The federally insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), is a unique and powerful financial planning product. It is structured so that the maximum borrowing power increases as the borrower ages, regardless of the underlying value of the property. However, that feature and the functions that make it happen are often misunderstood.
Consider a homeowner who qualifies for $200,000 in principal and uses ALL of it, presumably to access cash, pay off a traditional mortgage, and pay closing costs. Assuming a 5% compounding rate (including interest and mortgage insurance) and no payments, the borrower would owe $210,000 after the first year.1 Essentially, the homeowner “borrowed” $10,000 in interest they did not wish to pay.
But what happens when the borrower doesn’t use all their principal? Most HECMs are adjustable-rate loans where the unused principal can be left in a growing line of credit. Some will even have a set-aside for specific purposes, like repairs or property charges. Those items grow at the same rate as the loan balance, giving the homeowner more borrowing power as they age.
The following critical questions naturally arise:
How does the line of credit (and set-aside) grow?
What happens when I draw from my line of credit?
Does my line of credit grow when I make a prepayment?
What happens when property charges are paid from my set-aside?
What happens to the set-aside and line of credit when the loan matures?
Fortunately, all these questions can be answered by understanding the following simple formula:
Principal Limit = Line of Credit + Loan Balance + Set-Asides
The Current Principal Limit of a HECM loan is shown on the borrower’s servicing statement, and it represents the total borrowing power at a given time. Here is the formula explained: The borrower’s maximum borrowing capacity at any time equals the sum of money they CAN borrow plus money they HAVE borrowed plus required reserves.
This formula will explain quite a bit and can answer many critical questions, like the following:
1. How does the line of credit (and set-aside) grow?
The HECM product was created so that borrowing power increases with age. To do this, all portions of the reverse mortgage formula grow at the same rate: the current interest rate plus 0.50%.2
Assuming 5% growth, no draws, no prepayments, and no set-aside disbursements, the HECM loan would perform like this:
Principal Limit = Line of Credit + Loan Balance + Set-Asides
At closing: $200,000 = $100,000 + $50,000+ $50,000
After 1 year: $210,000 = $105,000 + $52,500 + $52,500
Notice the HECM loan and the reverse mortgage formula stay in balance after loan accruals and growth.
2. What happens when I draw from my line of credit?
When draws are taken from the line of credit, the line of credit is reduced by the amount of the draw, and the loan balance increases. The loan is still in balance, and nothing else is impacted by the draw.
3. Does my line of credit grow when I make a prepayment?
Yes. A voluntary prepayment is the opposite of a draw. The loan balance is reduced by the amount of the prepayment, and the line of credit grows dollar-for-dollar. The loan is still in balance, and nothing else is impacted by the draw.
4. What happens when property charges are paid from my set-aside?
When property charges like property taxes are paid through a Life Expectancy Set-Aside (LESA), the set-aside is reduced by the amount of the payment, and the loan balance increases. The loan is still in balance, and nothing else is impacted by the draw.
5. What happens to the set-asides and line of credit at loan maturity?
Remember, the line of credit and the set-aside represent money you have not borrowed. They are both forms of credit. Therefore, when the loan matures, that credit is not extended to the estate. The HECM has no additional borrowing capacity other than the loan balance, which continues to grow. At this point, the line of credit and the set-aside go away, and the current principal limit equals the loan balance as shown here: Principal Limit = Loan Balance.
This formula can be verified on the servicing statement and holds true with few exceptions.3 Write it down. If you are a reverse mortgage professional, memorize it. This formula can answer many critical questions that arise.
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
Dan Hultquist
1. Technically, the loan balance would accrue slightly more than described because HECM loans compound monthly at 1/12th of the interest rate and MIP rate.
2. Some HECM loans originated between 2013 and 2017 had an MIP rate of 1.25% rather than the 0.50% rate offered today.
3. If this formula does not hold true when reviewing the monthly servicing statement, these are possible explanations: a) Within the first year of the loan there may be initial disbursement limits; b) The borrower has had a TENURE payment for more than 5 years AND lives past age 100; or c) The loan is an older HECM where the servicing fee set-aside grew at a different rate.
For compliance and legal reasons, there are many topics and phrases we should avoid when discussing reverse mortgages with a homeowner. The following is a list of such deceptive talking points:
Don’t tell them, “The reverse mortgage is tax-free cash”
While you may see ads that use this phrase, the CFPB considers this deceptive because the borrower must pay property taxes. Furthermore, there are other taxes paid with a reverse mortgage at closing (or after the home sells) like intangible tax, transfer tax, recording fees, state tax stamps, and even capital gains taxes.
Don’t tell them, “There is no payment”
The CFPB has flagged this phrase as highly deceptive because taxes, insurance, condo dues, HOA dues and more must be paid. It is more compliant to say, “a reverse mortgage requires no regular monthly principal and interest mortgage payments, but property charges must still be paid.”
Don’t tell them, “You will never lose your home”
Many will assume you cannot lose your home with a loan product that defers principal and interest payments, but that is not true. The easiest way to lose your home with, or without, a mortgage is failure to pay your property taxes.
Don’t tell them, “Making payments will give you a TAX break”
Any voluntary prepayments are applied to the mortgage insurance first, which may, or may not, be deductible. They may have a long way to go before payments are applied to mortgage interest, which again may provide no benefit. Only their CPA or tax planner will know the tax benefit for certain.
Don’t tell them, “We eliminate your debt”
The CFPB considers phrases that imply the elimination of debt to be deceptive. A reverse mortgage can wipe out liens secured by the home, but that doesn’t make one debt-free. Rather we transfer debt, replacing the existing mortgage with an equally large, or larger, liability.
Don’t tell them, “There are no income or credit qualifications”
We underwrite the loan through a process known as financial assessment. While low income or poor credit may not directly disqualify the borrower, it may indicate the need for a sizeable life expectancy set-aside (LESA) to pay property taxes and insurance. This sometimes disqualifies the homeowner.
Don’t tell them, “A reverse does not affect government benefits”
While Social Security and Medicare are not adversely impacted, a reverse could impact other benefits. For example, a borrower who draws funds and places them in a bank account may not qualify for Supplemental Security Income or Medicaid – both means-tested programs for those that need them.
Don’t tell them, “Your LOC is earning interest”
While their available line of credit continues to grow at a very nice rate, that is not interest. The borrower is not earning anything. LOC growth simply represents a greater capacity to borrow more money in the future regardless of their current home value. Remember, the LOC is a form of “credit.”
Bonus:
While this list is certainly not comprehensive, extra caution should be taken when discussing the following topics:
Investment, insurance, or tax advice
Removing or adding anyone to title
Making or skipping mortgage payments prior to closing
Specific counseling agencies and their fees
The ability to refinance the loan in the future
For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.
RapidReverse® has always offered a simple answer to a complex problem. It was designed to provide reverse mortgage professionals with 100% accurate principal limits for the federally insured Home Equity Conversion Mortgage (HECM). And RapidReverse can do that, and more, in 10 seconds or less.
However, it has relied on each user knowing current Expected Interest Rates. Remember, the Expected Interest Rate is not the borrower’s interest rate. Rather, it is the best estimate of what a loan might average over the next 10 years. HUD requires us to use that figure when calculating a borrower’s principal limit.
For example, if I sell a HECM ARM between Tuesday 4/18/23 and Monday 4/24/23, the average 10-year CMT from the previous week – 3.44% – would be added to the lender margins shown below:
“But how do I know the weekly average of the 10-year CMT?”
Over the last year, this was the top request – “Let ME choose the lender margin, and YOU tell me current Expected Interest Rates in the mobile app.”
DONE! Thanks to my good friend and business partner, Tom Blankenship, RapidReverse now pulls the weekly average 10-year CMT every weekend. Your mobile application will reflect updated expected rates the next time you open it.
Update Notices:
The slider is now labeled “Lender Margin” and will default to 2.5%.
The “Expected Interest Rate” is now a calculated figure.
The Tool Tips next to each term have been updated for easy explanation.
Traditional loan origination systems may not be updated until Monday afternoons.
One additional advantage to this update: The Report now uses the current expected rate (rather than the rounded expected rate) to generate loan balance accruals and line-of-credit growth. This makes the reporting function more accurate.
We hope you enjoy this update. Please reach out to me with any questions.
After June 30, 2023, the 1-month and 1-year LIBOR indices will no longer be published. Therefore, existing borrowers with LIBOR-based loans must be notified, prior to their next rate adjustment, that the variable portion of their interest rate will be tied to an alternate index.
What can you tell me about the LIBOR Transition?
The most popular reverse mortgage product is the federally insured Home Equity Conversion Mortgage or HECM. Most HECMs in service are variable-rate loans where the rate is adjusted periodically using an established lender margin plus a published index. Loan originators currently sell HECM ARMs tied to the Constant Maturity Treasury (CMT), but that was not always the case. Many HECMs originated prior to 2021 utilized an international index known as the London Interbank Offered Rate or LIBOR index.
Here are some of the questions I’ve received on this topic as well as my best efforts to answer them:
WHY IS THE LIBOR GOING AWAY?
First, the LIBOR index was somewhat inaccurate, as it didn’t accurately measure the cost of institutional borrowing. More problematic, however, is that the LIBOR was open to manipulation. This is because 1) It relied on self-reporting, and 2) Large banks could make money by strategically trading at the right time. In fact, it was the source of the largest banking scandal in history at the time.
Fortunately, this scandal had no apparent impact on reverse mortgage borrowers. But in 2017, British officials announced their plan to eventually close the published index.
IS THE LENDER AUTHORIZED TO CHANGE THE INDEX?
Yes. Every HECM ARM borrower signed a HECM ARM NOTE at closing. Section 5 of the NOTE states, “If the Index is no longer available, Lender will use as a new Index any index prescribed by the Secretary (HUD). Lender will give Borrower notice of the new Index.” These notices will be sent in 2023 and 2024 depending on the borrower’s adjustment date.
WHAT DID HUD’S 2021 MORTGAGEE LETTER ACCOMPLISH?
When HUD published Mortgagee Letter 2021-08, HUD officially removed the LIBOR index as an option for originating new HECM loans. While the industry had already shifted to the CMT index, HUD also approved the Secured Overnight Financing Rate or SOFR index.
In addition, HUD chose to 1) update the HECM Model Note, 2) remove a comingling prohibition that would allow the SOFR to use the 10-year CMT for calculating expected rates, and 3) eliminate negative index values if rates were to drop that low in the future.
WHAT IS THE REPLACEMENT INDEX?
The U.S. Department of Housing and Urban Development (HUD) announced on March 1, 2023, the establishment of a “spread-adjusted SOFR” index. This was identified as the HUD-approved replacement index when transitioning away from the LIBOR.
The SOFR is a U.S.-based LIBOR substitute. The reason it is “spread-adjusted” is because the SOFR is designed to be an overnight rate. The spread accurately accounts for differences between the SOFR when compared to the 1-month and 1-year LIBOR. This makes the spread-adjusted SOFR the most appropriate replacement index available.
WILL ALL OTHER TERMS OF THE MORTGAGE APPLY?
Yes. According to HUD’s announcement on 3/1/23, “For existing mortgages that transition to spread-adjusted SOFR, we do not anticipate a significant economic impact. For all existing FHA-insured ARMs, the per-adjustment and lifetime caps on total adjustments will continue to apply, minimizing the impact to borrowers or mortgagees as a result of the transition to SOFR.”
For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.
The federally insured reverse mortgage product known as a Home Equity Conversion Mortgage or HECM has been around for more than 30 years. During that time, the U.S. Department of Housing and Urban Development (HUD) and other governmental agencies have added layers of protection for older Americans. Let us begin at #10 and count our way down to #1.
10. Counseling protocol
HUD regulations require each borrower to receive HECM counseling from a HUD-approved agency. This is done to ensure that the consumer has been advised on the product by someone other than the loan originator. One role of the counselor that is critical and often overlooked – a required assessment to determine if the borrower understands the basics of the HECM product.
9. HECM-to-HECM refinancing tests
To prevent loan flipping, equity stripping, or churning, there are restrictions when originating HECM-to-HECM refinances. HUD has their requirements, but industry trade associations and lenders have ethical overlays to consider. In essence, we need to show that the refinance offers a bona-fide advantage to the client before refinancing.
8. The HECM maturity date
So long as the loan remains in good standing, the default HECM maturity date is 50 years beyond the youngest borrower’s 100th birthday. This date is listed in the Security Instrument and is set with the expectation that the borrower will not outlive the HECM loan. For a consumer concerned about the loan maturing, outliving a HECM should be the least of their concerns.
7. Cross-selling restrictions
Cross-selling is the practice of offering a client an additional product that might interest them. This might be an insurance policy, an annuity, or an investment. To some, that sounds harmless. But this practice opens the door for exploitation. While a reverse mortgage is designed to increase cash flow, decisions on the use of funds should be left to the borrower and their trusted advisors.
6. Initial disbursement limits
In 2013, HUD began restricting initial disbursements with the HECM product. As a result, homeowners may not be able to access all their principal limit upfront unless those funds are paying off large mortgage balances. This regulation worked. It protected consumers from over-consuming their line of credit, and we find that borrowers are now using the product more prudently.
5. Principal limit protection (PLP) lock
Long-term interest rates (expected rates) determine a HECM applicant’s borrowing power. When expected rates rise, the borrower will qualify for less principal. Fortunately, HUD allows us to “lock-in” an expected rate to protect the applicant. So long as closing takes place within 120 days of FHA case number assignment, the borrower has principal limit protection.
4. Financial Assessment
Since 2015, every lender must evaluate each borrower’s ability meet their financial obligations and to comply with the mortgage requirements. Those requirements are to 1) Occupy and maintain the home, and 2) Pay all property charges. HUD-required Financial Assessment is all about consumer protection. We must make sure this is a sustainable solution for all HECM borrowers and their households.
3. Non-borrowing spouse
HUD defines a non-borrowing spouse (NBS) as “the spouse of the HECM borrower, at the time of closing, who is also not a borrower.” With this consumer protection in 2014, the due & payable status of a HECM loan may be deferred for an eligible NBS after the death or incapacity of the borrowing spouse. While the NBS cannot borrow, they may be able to remain in the home for life.
2. HECM line-of-credit
The HECM line-of-credit (LOC) is a consumer protection because the borrower can draw funds as they need them, irrespective of home value. The LOC is not only secure, but also the available LOC grows at the same rate the loan balance grows (monthly at 1/12th the interest rate plus 0.5%). This gives the borrower a greater capacity to draw more of their equity in the future.
1. The non-recourse feature
My top consumer protection is the Non-Recourse Feature because it benefits both the homeowners and their heirs. When the homeowner chooses to sell the home, or passes away, FHA guarantees that neither the borrower nor their heirs will owe more than the home is worth at the time the home is sold. The homeowner does not carry any of the risk of the home becoming upside down.
There are two results of these regulatory reforms, 1) HECM lenders receive few CFPB complaints about the product, and 2) Client satisfaction is high.
So, there you have it – my Top 10 list of Reverse Mortgage Consumer Protections. Tell me if you think the order is accurate and if I have missed any critical advantages.
For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.
When making big decisions, procrastination is only natural. We fight this battle every morning when we determine which activities are important, and which are easy. Unfortunately, making estate planning decisions based on tax law, Social Security strategies, Medicare guidelines, market conditions, and interest rate projections, is not easy. One thing we know for sure – if you are a homeowner 62 and older, waiting to get a reverse mortgage simply doesn’t pay.1
When a Financial Planner tells a homeowner that their funds will run out at age “X”, the EASIEST solution is to say:
“If I live to age ‘X’, I will consider a reverse mortgage. Otherwise, I’ll crack open the home equity nest egg by 1) selling the home and 2) either move into a retirement home or move in with family members.”
The easy solution is rarely the best. Some of the brightest retirement researchers have been publishing guidance in the Journal of Financial Planning for nearly 10 years stating that waiting and using the reverse mortgage as a “last resort” is generally not a good idea.2 Waiting reduces the amount of funds available to a homeowner when they need the funds when compared to those who obtained one early in retirement. In addition, there are substantial risks of waiting that cannot be ignored.
WHY DO WE HEAR INACCURATE ADVICE?
If you only have a basic understanding of reverse mortgages, waiting appears to be the right advice. After all, older borrowers get more money, right? If I wait 5 more years, I’ll be older, which generally allows the homeowner to qualify for a higher percentage of their home’s value. In addition, my home will be worth more and I will have paid down my traditional mortgage.
These may seem like logical reasons to wait… to the novice. But those who understand reverse know this is foolish and mathematically incorrect.
HERE ARE A FEW REASONS WHY THEY ARE WRONG:
Reverse mortgage proceeds are also based on interest rates
Long-term rates are still historically low, and that means homeowners currently qualify for higher principal limits. If a homeowner waits – and rates go up – they will qualify for LESS with a reverse mortgage. While there is no way to know future rates, most analysts believe they should, and will, go up. This could dramatically reduce an applicant’s proceeds.
Homeowners who get a reverse mortgage at age 62 are not required to borrow the funds for which they qualify. In fact, unused principal will grow – in the borrower’s favor – at current interest rates plus 0.50%. If a homeowner gets a reverse mortgage now, the available line-of-credit (LOC) will grow even faster as interest rates go up. Many reverse mortgage applicants who understand this concept WANT interest rates to rise. This increasing credit line creates future security later in retirement.
There is no guarantee one will qualify in the future
The federally insured reverse mortgage changes periodically. While some changes may be advantageous, most have created additional challenges. Consider that many homeowners believe reverse mortgages don’t consider credit history and income. That is not true, and since 2015 many who decided to wait until a reverse mortgage was desperately needed, found that they no longer qualify under HUD’s financial assessment guidelines.
While we don’t want to create an unmerited sense of urgency, homeowners need to be aware that research shows that waiting for a reverse mortgage generally isn’t optimal and NOW may be the best time to obtain one.
For more information on the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.
