With low interest rates being so widely publicized, some originators are seeing borrowers that might otherwise be good reverse mortgage candidates instead refinance their existing mortgages when possible.
“Rates are much more in the forefront of advertising and media then they ever have been before, which could directly lead to more seniors looking at conventional mortgages as a way to save money without giving the reverse mortgage a thought,” says Brian Cook of Pinnacle Mortgage.
Given the historical low rates today, and how frequently those rates are reported in mainstream media and advertisements, some originators say the problem may be more present today.
“I think in some cases this is happening,” says Jim Cory, CEO of Legacy Reverse. “We haven’t seen anyone cancel a reverse mortgage application because of this, however we have seen potential customers who look promising decide to go with a conventional refinance. Falling home values are one of our biggest hurdles, and it appears customers may be using the low rate conventional refinance to delay getting a reverse mortgage because of this.”
The issue may be complicated given that borrowers are familiar with forward rates to begin with, rather than the components of reverse mortgage interest rates.
“It’s very difficult to explain to a borrower why a reverse mortgage has a higher rate,” says Cory. “I should actually say it’s very easy to explain to them, however they rarely understand it. So in some cases, someone might opt against a reverse mortgage because of the higher rates, though in many ways it doesn’t seem to be a rational decision—in other words, the reverse mortgage may still accomplish their goals and provide the safety they need for their retirement plans, regardless of the cost as compared to something so different.”
While there’s little evidence as to the actual instance of people choosing to refinance over taking a reverse mortgage, it could happen in some cases, says John Lunde, president co-founder of Reverse Market Insight.
“It makes sense that people might do this assuming they have income to qualify, simply because they’re more familiar with forwards so people tend to go with what they know unless there’s a lot of incentive to change,” Lunde says. “I don’t think low rates change the story for reverse relative to forward because they’re generally both affected by the same rate movements in the same direction.”
At the end of the day, some say the issue is really like comparing apples to oranges and that for a needs-based borrower, the reverse is often the best or only option if the borrower does not have income to qualify for a forward refinance.
“Each situation is different – the reverse may well serve some, but not be the best choice for others,” says George Downey, of Harbor Mortgage Solutions. “The notion that some are losing reverse business to refinancing of forwards indicates to me that the reverse was not the right solution in the first place.”
The decision is based on what the borrower wants to achieve, Lunde says.
“It comes down to people being familiar with the product and valuing cash flow from lack of payment and downside home price protection versus retaining equity by spending monthly cash flow on payments,” he says.
Written by Elizabeth Ecker
