HECM Loan Terminations - Reality Check for Potential Borrowers
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One of the key factors in assessing whether a HECM reverse mortgage makes financial sense is the length of time the borrower believes they will remain in the home. Remember, a reverse mortgage comes due in full upon death or moveout of the homeowner(s). Reverse mortgage advisors typically counsel potential borrowers that they should have strong expectations of staying in the home at least five years. (Many say seven years is a better threshhold.) Terminating early means you will have borrowed money at a very high cost for a short period of time.
But if borrowers start out with intentions of staying put for the long haul, data contained in a recent study from HUD shows that, for many, the reality winds up being quite different. The study’s focus is on developing data to help private investors understand the unique cashflows of HECM reverse mortgages in hopes of spurring development of an efficient secondary market for HECMs and other reverse mortgage products.
The data also serve as a reality check for senior homeowners contemplating a reverse mortgage. For example, as the table and graph below show, less than half (47.9%) of HECM loans for which observable history is available have “survived” past year six. Typical reasons for termination include death, moveout (voluntary sale, medical necessity, etc.), or refinancing. But whatever the case, a large share of HECM loans terminate in a relatively short period.
Couples, as would be expected, have longer loan tenures than either single female or single male borrowers. The study provides further details about loan terminations for borrowers who originate HECMs at different age levels. This topic will covered in a future post.
In interpreting this information keep in mind that the HECM program is not yet 20 years old and it has only been in the last 2-3 years that the popularity of HECM reverse mortgages has grown significantly. Better data will become available as these more recent loan originations mature.
| HECM Loan Termination Rates by Borrower Type (Due to Death, Moveout, Etc.) |
||||
|---|---|---|---|---|
| Policy Year |
All Borrowers |
Couples With Younger Borrower in Age Group |
Single Female Borrowers |
Single Male Borrowers |
| 0 | 100.0% | 100.0% | 100.0% | 100.0% |
| 1 | 98.0% | 99.0% | 97.6% | 97.0% |
| 2 | 89.5% | 93.3% | 88.3% | 84.8% |
| 3 | 77.5% | 83.6% | 75.6% | 69.5% |
| 4 | 66.4% | 73.7% | 64.2% | 57.4% |
| 5 | 56.4% | 64.0% | 54.2% | 46.9% |
| 6 | 47.9% | 55.6% | 45.6% | 38.3% |
| 7 | 40.1% | 47.4% | 37.8% | 31.3% |
| 8 | 33.1% | 40.0% | 31.0% | 25.1% |
| 9 | 26.9% | 33.1% | 25.1% | 19.6% |
| 10 | 22.1% | 27.8% | 20.4% | 15.3% |
| 11 | 18.0% | 23.7% | 16.4% | 12.0% |
| 12 | 15.0% | 20.2% | 13.3% | 9.8% |
| 13 | 12.5% | 17.2% | 11.0% | 8.0% |
| 14 | 10.9% | 14.7% | 9.7% | 6.6% |
| 15 | 9.5% | 12.9% | 8.6% | 5.6% |
| Source for Data: Home Equity Conversion Mortgage Terminations: Information To Enhance the Developing Secondary Market (Table 9A), U.S. Department of Housing and Urban Development • Office of Policy Development and Research | ||||
Article Series - hudstudy
- HUD Study Provides Insights About HECM Borrowers
- HECM Loan Terminations - Reality Check for Potential Borrowers
- HECM Pay Off Rates for Different Age Borrowers
- Ginnie Mae Notes Significance of HUD Study to Reverse Mortgage Market
A Few More Related Articles of Interest:
May 29th, 2007 at 3:06 am
Hubby is 66 this year, I’m 58. We’re having Financial Freedom, the number 2 lender, do the loan for us. It costs $15,000 to make the loan. We have a $40,000 pay off balance which Financial Freedom will incorporate into the loan. It will cost $35.00 each month to monitor the loan. So what are the 1%, 2% and 2.5% referring to? Also there is a graph showing age of borrower and a percentage sliding downward. I’m told to try to get a fixed rate–and Financial Freedom is doing ours with a variable rate. Do you know of someone doing a reverse mortgage with a fixed rate? Do you think the loan companies squander our equity: $15,000 for loan costs, Variable rate which we can’t predict how high it will go, and a monthly charge to “watch” it.
Wanda Jordan
May 29th, 2007 at 10:13 pm
I’ll try to answer some of questions as best I can:
1. BNY is the only lender I’m aware who offers a fixed rate reverse mortgage. It’s a very new product. Here’s a link to it: http://www.bnyreverse.com/hecm_fixed.htm
2. Financial Freedom is a reputable lender, but reverse mortgage costs are high everywhere. The $35/mo servicing fee is about standard, though you can find lenders who charge $30.00. The other costs are dependent largely on how big the loan will be for.
3. Visit an online RM calculator like this one http://nrmla.edthosting.com/ and play with it see if the figures match up at all with what you’re being told.
4. The 1%, 2% figures you refer to may be the interest rate margin on the loan, or the mortgage insurance premium…not clear from your comment
5. You need to be sure to take full advantage of the reverse mortgage counseling sessions. It sounds like you have lots of doubts so you perhaps should re-schedule a session and make sure you get your concerns addressed.
6. The fact that you’re only 58 is reason for concern. If you are on the home title, you’ll likely not qualify for a reverse mortgage. If you’re not on the title and your husband dies, you likely would have to pay the reverse mortgage off immediately.
If I were in your shoes I’d spend a couple hundred dollars to sit down with a reputable “fee-only” financial planner in your area who knows something about reverse mortgages. If you don’t want to spend the money on this, contact a competing lender and see what they have to say about your situation.
June 20th, 2007 at 2:16 pm
[…] But there is a downside. Reverse mortgages carry steep upfront closing costs for things like appraisals, mortgage insurance, and lender’s fees. The key to a successful reverse mortgage transaction is to have the loan outstanding for a long time (seven years or more) to amortize these costs. If the loan is paid off within a few years, the true cost (APR) of borrowing can be very high. However, a recent study published by HUD indicates that most reverse mortgage loans terminate within seven years. […]
March 7th, 2008 at 4:38 pm
As I read about the high cost of reverse mortgages and the average length in which a senior has the HECM, it makes me wonder if the people writing these professional stories really understand the program completely.
HECMS cost more, however, when comparing the cost of a reverse mortgage to options… they tend to make more sense.
1) Sell your home/downsize = cost more due to 4-6% to a realtor + the cost of moving
2) regular mrtg = cost less, anywhere from $500 for a line ofr cedit to 2.5% for traditional prime mrtg, however, there is a monthly payment that must be made or the borrower may lose the home.
And as for the amount of time a average seniors has a HECM .. how many of those HECMS were refinanced into a new HECM to access more funds? For someone to say, “…a successful reverse mortgage transaction is to have the loan outstanding for a long time (seven years or more) to amortize these costs.” A more accurate answer of what is a successful reverse mortgage depends on each individual case. A family member helped a church member get a reverse mortgage to save their home from foreclosure and after only 2 years, decided to sell the home and walk away with almost 100k.
And back to cost… no one is breaking down these cost… a reverse mortgage cost approx. 2% more than a regular mrtg… and why?
The government collects 2% MIP to protect the borrowers estate.
HUH!?
April 9th, 2008 at 6:11 pm
[…] highlighted findings of the HUD study in a post several months ago about HECM reverse mortgage terminations. The graph below is taken from data in this HUD study and shows loan terminations for different […]
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