is there a role for reverse mortgages in financial...
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Is there a role for Reverse Mortgages in financial planning?
John Salter, PhD, CFP®, AIFA® Associate Professor of Personal Financial Planning, Texas Tech University Vice-President, Wealth Manager, Evensky & Katz Wealth Management
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Way to convert home equity to a useable resource – a mortgage in reverse.
Home Equity Conversion Mortgage (HECM) Insured by FHA
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What is your initial thought? Expensive? Last resort only?
Was ours too…
Until we were educated.
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Must be age 62 or over.
Pay taxes and insurance.
Maintain home.
Current mortgage must be paid off or rolled into HECM.
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Must be primary home and currently lived in, can be out 365 consecutive days.
Single family property, HUD-approved condo, or up to 4-unit home.
Borrower must complete counseling prior to closing.
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Prior, there was no credit or asset check.
Due to this, near 10% of reverse mortgages were in tax and insurance default.
Most likely will be more formal credit check and test for assets related to paying taxes and insurance.
No longer a “last resort?” 7
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The amount of home equity available based on certain factors up to the home value limit $625,500.
Think loan to value ratio, but home value in ratio capped at limit.
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Calculated using following factors
Age of the youngest borrower
Older yields higher benefit
Interest rates
Lower expected rates (expected) yields higher benefit
Currently based on 10-year LIBOR swap rate
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Tenure- equal monthly payments for life as long as in home
Term- equal monthly payments for a fixed period of time
Line of Credit- unscheduled payments or in installments
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Mortgage closing costs
Title insurance, appraisal, attorney fees, etc, etc…
Mortgage Insurance Premium (FHA) = 0.5% ▪ Exception if > 60% PLF is used in first year, then 2.5%
Origination fee
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Combination of
FHA Mortgage Insurance Premium = 1.25%
Lender Margin = up to 3%
LIBOR rate = variable, geometric average = 2.8%
Today, would equal ~ 4.45%
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No monthly principal or interest payment required
Proceeds are tax-free Interest deductible when paid (and itemizing),
interest payback is front loaded (Please consult a tax advisor)
Benefit type can be changed
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HECM (FHA insured) is non-recourse, the borrower or their estate will never owe more than the value of the home upon sale or death.
The loan can not be called/cancelled as long as requirements are met.
Unused line of credit grows over time.
Can refinance if terms become better (upfront fees apply just as refinancing a traditional mortgage)
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They aren’t free
Misuse or ill advised use – bad press
Stigma of using the home value; debt
Misconceptions – I’ll lose my home, bank owns home
Mobility risk
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Cost sensitivity.
Misunderstanding the product.
FINRA over-compliance has been a big issue.
Complete disregard due to compliance issues – document use of proceeds.
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The flexibility and attributes of this product has yielded many ideas of possible uses, here are a few.
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HELOC Reverse Mortgage
Line growth? No Yes
Cancelable? Yes No
Requires repayment? Yes No
Age restriction? None 62
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Investment Portfolio (Bucket)
Cash Flow Reserve Account (Bucket)
Retirement Living Expenses
Refill when rebalancing,
making changes Standby RM
(Bucket)
Borrow in bear market
and cash depleted
Payback
when portfolio back to acceptable
or when CFR account is depleted, portfolio
acceptable
Goal – to avoid selling assets in bear markets
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Set up line of credit today, let grow to be used in the future.
Grows at rate of 4.25% + LIBOR, can grow to more than home value.
Use proceeds when portfolio is exhausted.
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Annuitizing home equity through tenure payment option rather than, or in addition to, the portfolio.
Mortality issue intriguing.
Currently researching this example.
Results suggesting a good alternative, best when utilizing IA and standby methodology. 21
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Use HECM to refinance existing mortgage, either pay off or not.
Currently researching this example, seems to be optimal for few scenarios ran.
Yielded maximum wealth as well as probability of meting goals.
Unused LOC can grow for future use. 22
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An issue of many people retiring early, not by choice.
May be optimal to defer Social Security, can use term payment feature to supplement income during the deferral years.
This is a “possible” idea!
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Initiate LOC today, convert to tenure payment later.
Simulating idea of longevity insurance – deferred SPIA.
Asset control is never given up to insurance company.
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Once I was educated, the ideas opened up.
There is nothing wrong with the product, only past use and behavioral issues.
Home equity can and will be an important for everyone.
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Questions?