How can you compare HECM loan costs?
Your HECM counselor can help you see how total loan costs compare.
Which is better: a fixed-rate loan with a higher interest rate but lesser total loan fees - OR - an adjustable-rate loan with a lesser initial interest rate but higher total loan fees?
And just to make it more difficult, let's say
o the fixed-rate loan requires you to take
all your available loan funds in a single
lump sum at closing (even if you don't
need them now); but
o the adjustable-rate loan lets you withdraw
your loan funds as and when you need
them from a line-of-credit account, and the
amount of funds remaining available to you
in that account grow larger each month.
That's the puzzle facing many HECM borrowers today.
Some lenders think it's so complicated that it's "freezing" potential customers into indecision.
Others are concerned about their potential liability for "steering" consumers into the loan choices that make the most money for them but are poor choices for their customers.
Basic Issues
No matter which lender you select or which
loan choices you are considering, you need
to understand the basic cost issues involved.
o The interest rate on fixed-rate loans is
greater to begin with. And it will continue
to be greater until and unless the initially
lower rate on the adjustable-rate loan rises
to equal the rate on the fixed-rate loan.
o Since the fixed-rate loan requires that you
take all your loan funds immediately, you
will be paying interest on that full amount.
But on the adjustable-rate loan, you are
only charged interest on the funds you
actually use.
o So the key question is whether the total
interest charges and fees on the fixed-rate
loan will be greater than the ones on the
adjustable-rate loan at various future
points in time.
Rules of Thumb?
Some lenders say that
if you need all the loan funds now or soon, you should definitely take the fixed-rate HECM; but
if you only need some of the loan funds now and don't expect to be using all of them soon, you should definitely take the adjustable- rate HECM.
Generally speaking, that's probably good advice. But it's not always that simple (unless you are receiving Medicaid benefits, or expect you might qualify for them at some point before your loan ends).
For example, if you really need all the funds at closing, then the adjustable-rate loan might in some cases be less expensive even with the
extra fees so long as the interest rate remains low.
On the other hand, if you need, say, half the loan amount at closing, and then the rest in small amounts here and there, then the fixed-rate loan could end up being less costly if interest rates rise sharply.
So unless you have a crystal ball that can predict future interest rates (or a strong hunch that you're willing to rely on), you might want to get a better sense of how future interest rates would affect the cost of different loan choices.
Comparing Costs
Your HECM counselor can help you compare the cost of an adjustable-rate HECM with with all your available loan funds lin a line-of-credit versus a fixed-rate HECM that requires you to withdraw all your loan funds in a single lump sum at closing. Here's how
:
First, ask yourself how you would expect to use the creditline loans funds. Specifically, how much would you expect to take at closing, about how much each year after that, and how long would you expect to have your loan? Answering these questions may be hard, but make your best guesses.
Second, give this specific information to your HECM counselor. (If you have any specific cost figures from a lender, give the counselor this information as well.)
Third, ask your counselor to use this information to compare an adjustable-rate creditline versus a fixed-rate 100% lump sum.
Fourth, ask the counselor to show you the Reverse Mortgage Comparisons report from the Reverse Mortgage Analyst software. This report shows you the total cost in dollars and as a total annual rate for each loan side-by-side at various future times.
Fifth, for more information, ask the counselor to run a Loan Amortization Schedule for each loan. This will show you more detailed cost information on a year-by-year basis.
To see the impact of higher interest rates on the adjustable-rate loan, ask your counselor to re-run the figures with a higher rate. You might also want to consider the comparative loan costs if your loan were to run for a shorter period than you now expect.
This type of analysis is the only way for you to see clearly how the projected cost of a fixed-rate versus an adjustable-rate HECM would compare.
As you consider different loan choices, you will also find differences in loan amounts.
The fixed-rate HECM currently provides a larger initial loan amount. But the amount of loan funds remaining available to you in an adjustable-rate HECM creditline will grow larger each month until you withdraw all remaining funds.
Your HECM counselor can show you these loan amount differences as well.