Are HECM Reverse Mortgages Too Cheap?
February 16, 2010
Reverse mortgages have been getting some good press of late. Jack Guttentag, for instance, a.k.a. "The Mortgage Professor," has spent a couple thousand words over the past couple weeks ripping into reverse mortgage fear mongers who claim that reverse mortgages are a rip-off.
Guttentag's latest column, titled "More Bogus Arguments Against the Reverse Mortgage," includes an interesting change of perspective regarding the costs of an HECM reverse mortgage, a government-backed loan which is by far the most popular type of reverse mortgage.
Typically, excessive costs are described as the most negative thing about taking out a reverse mortgage. But Guttentag nicely reverses the thinking on that point, wondering aloud if HECM costs are not actually too low to cover the exposure of the FHA that backs this loan.
The reasoning behind this argument is that the mortgage insurance aspect of an HECM is usually about half the total closing costs of an HECM. And in some cases, for example if a senior only uses the loan for 5 years, those closing costs certainly will appear excessive.
However, for a senior that lives a long time, or for a senior whose home declines significantly in value after the HECM loan is extended, the mortgage insurance aspect of an HECM may appear cheap in retrospect because the FHA that backs this loan is now exposed to these other factors which can affect the repayment possibility of the reverse mortgage.
Seniors who are considering a reverse mortgage can maximize their chances of getting a good deal by thinking long-term, not short-term, when they think about using this product.