securing retirement with a reverse mortgage:san diego mortgage and loans
TRANSCRIPT
Securing Retirement with
Home Equity Conversion Mortgages
2 San Diego Mortgage and Loans 760-500-1098
Agenda
HECM Basics
Borrower Protections
Fees/Costs
Product Misconceptions
Loan Amounts
Accessing Funds
Retirement Strategies
Right-Sizing the Home
Home Equity: The 4th component
Using home equity can help
supplement retirement income
and provide increased cash flow
• Provides tax-free cash*
• Requires no monthly mortgage
payments**
• Homeowners stay
in their home & retain title
*Homeowners should consult their tax advisor
**Homeowners continue to pay property taxes, homeowner’s insurance, keep up home maintenance. Although there are no monthly mortgage payments,
interest does accrue on the portion of the loan amount disbursed.
3 San Diego Mortgage and Loans 760-500-1098
Retirement Planning Using Home Equity
Retirement Account & Savings
Social Security
Home Equity
Pension
4
San Diego Mortgage and Loans 760-500-1098
HECM Basics
What is a HECM?
San Diego Mortgage and Loans 760-500-1098
5
A Home Equity Conversion Mortgage, HECM, is a loan that an
individual can take using the equity that they have built up in their home.
Program Features:
• Improves monthly cash flow by eliminating debt
• No monthly mortgage payments due1
• Loan proceeds are tax-free2
• Heirs inherit any remaining equity
• Net proceeds can be accessed
in multiple ways
• Interest may be tax deductible when
HECM is repaid3 1 Homeowners continue to pay property taxes, homeowner’s insurance, keep up home maintenance. Although there are no monthly mortgage payments, interest does accrue on the portion
of the loan amount disbursed. 2 Homeowners should consult their tax advisor. 3 IRS Website - http://www.irs.gov/publications/p936/ar02.html
6 San Diego Mortgage and Loans 760-500-1098
Eligibility
• Youngest borrower must be at least 62+ years of age
• Homeowner must live in home as primary residence (6 mo. + 1 day)
• Must be able to pay off their existing
mortgage using the HECM loan proceeds
• Property must be an eligible property type
7 San Diego Mortgage and Loans 760-500-1098
Additional Conditions • Borrower(s) must complete a HUD
approved 3rd party counseling session
• Property must be maintained according
to FHA requirements
• Borrower(s) must continue to pay
property taxes and homeowners
insurance
• Lending limit of $625,500
• HECM loan must be in first lien position
Borrower Protections
San Diego Mortgage and Loans 760-500-1098
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Non-recourse loan
3rd party counseling
Lien-holder not added to title
Property satisfies lien
Anti-steering regulations
Right of rescission
Program Protections – Repayment Events
San Diego Mortgage and Loans 760-500-1098
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1. Fails to pay taxes/insurance
2. Borrower no longer lives in/sells property
3. Fails to keep home up to FHA standards
No payments are required until a repayment event occurs.
Repayment events regulated by HUD guidelines
Loan Fees
San Diego Mortgage and Loans 760-500-1098 10
Reverse mortgages have many of the same fee types as a traditional
forward mortgage:
Loan Origination Calculation to determine amount
Fee $6,000 maximum
3rd Party Closing Appraisal, flood certification, title
Costs Examples insurance, notary, courier, recording, etc.
3rd Party Varies, depending on state/county
Closing Costs
Reverse Mortgage Specific Fees
San Diego Mortgage and Loans 760-500-1098
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There are two types of reverse mortgage specific fees, counseling
and mortgage insurance premium (MIP):
Counseling $75 - $125 average fee
HUD provides grant support making it
possible to get for free
Ongoing Mortgage 1.25% of loan balance annually
Insurance Premium
Upfront Mortgage .5% or 2.5% of max claim amount
Insurance Premium (depending on mandatory obligations)
Program Misconceptions
San Diego Mortgage and Loans 760-500-1098
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Myth # 1: The lender owns the home
Reality: Borrower retains title to home, no one is added
Myth #2: The home must be free and clear of existing liens
Reality: HECM designed to pay off existing liens
Myth #3: Loan proceeds are taxed
Reality: HECM proceeds are not income,
therefore not taxed
Myth #4: There are restrictions on
how to use proceeds
Reality: Any proceeds remaining after
paying off liens can be used however
the borrower wants, no restrictions
Myth #5: Only poor people need HECMs
Reality: HECMs provide an opportunity to diversify a portfolio and help
ensure against overdrawing existing retirement assets
13 13
Eq
uit
y A
vail
ab
le (
Pri
ncip
al L
imit
) Example: $500,000 Home Value
At Age 62, 72 & 82
HECM Loan Amounts – Net Proceeds
$263,000
$287,500
$310,500
$230,000
$240,000
$250,000
$260,000
$270,000
$280,000
$290,000
$300,000
$310,000
$320,000
62 72 82
14 San Diego Mortgage and Loans 760-500-1098
Accessing Funds
Disbursement Options - Fixed
San Diego Mortgage and Loans 760-500-1098
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Fixed Rate Loan: With a fixed rate HECM, all proceeds
available in the first 12 months are
disbursed to the client at funding. No
additional funds will be made available.
Disbursement Options - ARM
San Diego Mortgage and Loans 760-500-1098
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Lump Sum: Draw some of the available cash at closing*
Credit Line: Access money when they need it. Does not add
to loan balance until used. Available amount of
borrowing power can grow.*
Monthly Guaranteed monthly disbursements.
Disbursements: Disbursements set for a specific period of time
(Term) or for the life of the loan (Tenure). Does
not add to loan balance until used.*
Combination: Choose 1, 2 or all 3 options simultaneously*
(changing disbursements also available)
*HUD limits amount of first year withdrawal to 60% of the principal limit or the borrowers
mandatory obligations + 10%, whichever is greater.
17 17
Example: $500,000 Home Value
62 Year Old Borrower
Source: Liberty Home Equity Solutions, Inc., Quote Packages October 7, 2013. San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to
client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.
Line of Credit growth over the course of 30 years
LIBOR Disbursement – Line of Credit A
vail
ab
le L
ine o
f C
red
it
$252,497
$364,613
$526,511
$760,298
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
At age 62 + 10 Years + 20 Years + 30 Years
18 18
Example: $500,000 Home Value
62 Year Old Borrower
Source: Liberty Home Equity Solutions, Inc., Quote Packages Oct 17, 2013. For business professional use only. Not for consumer distribution. The preceding example and any
calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to client’s individual situation or
circumstance. Information contained within this strategy is not intended to replace qualified, professional investment and/or tax advice.
To
tal
Pa
ym
en
ts R
ec
eiv
ed
$1453/Month Throughout Retirement
LIBOR Disbursement – Tenure Payments
$174,450
$348,900
$523,350
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
10 Years 20 Years 30 Years
19 San Diego Mortgage and Loans 760-500-1098
HECM Strategies for Retirement
Hedge Against Home Declines
20
Impact on HECM LOC in declining housing market
Amount available dependent on home value
No monthly mortgage payments required
Available LOC balance will continue to grow if no draws are taken, regardless of home value
Source (LOC): Liberty Home Equity Solutions, Inc., Quote Packages October 7, 2013. Source (Home Values): No supporting documentation available. Declining home values are based on assumptions due to the economic climate in recent years. San Diego Mortgage and Loans 760-500-1098
$252,497
$271,751
$338,779
$500,000
$530,604
$424,483
$271,669
$282,645
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
62 63 64 65 66 67 68 69 70
Line of Credit Home Value
Client Facts: 62 year-old clients need to retire due to health
issues. $200,000 in retirement account,
relying on social security. Claiming social
security now will not provide enough income.
Home value is $500,000. No current mortgage.
Solution: Use a HECM to increase cash flow to a
sufficient amount to allow them to retire now,
but wait until age 70 to claim social security.
21
San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Case Study - Deferring Social Security
22 22
Monthly Disbursements By Age
Source: AARP online social security website calculator. $40,000 avg salary for one spouse, $20,000 avg salary for other spouse. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to
client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.
Mo
nth
ly S
ocia
l S
ecu
rity
Paym
en
ts
Age of Claiming Social Security
Claiming Social Security
$1,958
$2,437
$3,447
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
62 65 70
23 23
HECM Options
Source: Liberty Home Equity Solutions, Inc., Quote Packages October 17, 2013. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to
client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.
Mo
nth
ly R
evers
e M
ort
gag
e P
aym
en
ts
SS = $1958/Month @ age 62
SS = $3447/Month @ age 70
Deferring Social Security
$1,453
$2,016
$3,338
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Tenure @ 62 8 year term w/100k LOC
8 year termw/out LOC
24 San Diego Mortgage and Loans 760-500-1098
HECM Strategies: Deferring Social Security
Source: MoneyGuide Pro Illustration July, 2012
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Probability of successfully deferring SS
Client Facts: 62 year-old clients, $500k retirement account,
home value $500k, current mortgage $0.
Assumptions: Need $40k (plus SS) in first year, 3% annual
cost of living inflation,15% tax bracket, S&P
500 annual returns (1983 – 2012) used for ROI
Solution: Use HECM funds to offset increase cost of
living expenses to extend portfolio.
25
San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Case Study – Stretching Retirement Account
26 26
Source: Calculations based on assumptions listed on previous slide. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to
client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.
Acco
un
t B
ala
nce
HECM Solution – Stretching Retirement Account
Age
Savings Stretch From 18 to 30+ Yrs
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
No HECM With HECM
Client Facts: 62 year-old clients, $500k retirement account,
home value $500k, current mortgage $0. Need
$40k (plus SS) in first year
Assumptions: Need $40k (plus SS) in first year, 3% annual
cost of living inflation,15% tax bracket, S&P
500 annual returns (1983 – 2012) used for ROI
Solution: Use HECM funds to during S&P 500 down
years to allow value of assets in retirement
account to rebound.
27
San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Case Study – Allow Retirement Account Rebound
28 28
Source: S&P 500 from 1983-2012 and calculations based on assumptions listed on previous slide. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to
client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.
Acco
un
t B
ala
nce
HECM Solution – Retirement Account Rebound
Age
: Living expenses drawn from retirement account
: Living expenses drawn from HECM LOC
Line of Credit balance = $400,000 at age 93
S&
P 5
00 R
etu
rns
16.81%
2.34%
17.62%
-9.85%
8.03%
21.27%
34.11%
20.26%
31.01%
-10.14%
-23.37%
26.38%
3.00%
13.62%
3.53%
-38.49%
23.45%
12.78%
-60.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
Client Facts: 62 year-old clients, $500k retirement account,
home value $500k, current mortgage $0. Need
$40k (plus SS) in first year
Assumptions: Need $40k (plus SS) in first year, 3% annual
cost of living inflation,15% tax bracket, S&P
500 annual returns (1983 – 2012) used for ROI
Solution: Use HECM funds to delay draws from
retirement account until RMD is required.
29
San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Case Study – Defer Drawdown Until RMD
30 30
Source: Calculations based on assumptions listed on previous slide. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are
hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to client’s ind ividual situation or circumstance. Information
contained within this strategy is not intended to replace qualified, professional investment and/or tax advice.
Acco
un
t B
ala
nce
HECM Solution – Defer Drawdown Until RMD
Age
HECM LOC covers expenses through age 68 RMD exceeded necessary expenses age 78 - 89
$770k remaining in retirement acct @ age 93 $415k left in LOC if excess RMD paid back into RM
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
No HECM With HECM
RIGHT-SIZING THE HOUSE
For business and professional use only. Not for consumer distribution. 31
32
San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Right-Sizing the Home Example
Client Facts: 70 years-old
$500,000 current home
$0 existing mortgage
$350,000 new home
Does not want any monthly mortgage
payment with new home
33
San Diego Mortgage and Loans 760-500-1098
The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or
accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,
professional investment and/or tax advice.
Sales price existing home: $500,000
Selling costs (commission, fees etc.): $40,000
Net proceeds: $460,000
New home price: $350,000
Remaining funds: $110,000
Right-Sizing the Home Example – No HECM
34
Source: Liberty Home Equity Solutions, Inc., Quote Packages October 16, 2013. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified, professional investment and/or tax advice.
Net proceeds from home sale: $460,000
New home price: $350,000
HECM for Purchase funds: $197,400
Borrower funds to complete purchase: $166,853 (includes loan closing costs)
Remaining funds: $293,147
Right-Sizing the Home Example – HECM
Transaction similar to home refinance
It’s Flexible
• Fixed or adjustable rate
• Proceeds may be accessed in multiple ways and borrowers can change disbursement methods
It’s Safe
• FHA insured (HECM)
• Consumer counseling required
It’s Useful
• Use as a monthly cash flow tool
• Credit line
• Relieves existing debt and monthly mortgage payments
• Purchase a home (right-size or move to “retirement friendly” community)
35 San Diego Mortgage and Loans 760-500-1098
Summary
San Diego Mortgage and Loans 760-500-1098
Thank you for your time.
San Diego Mortgage and Loans 760-500-1098
APPENDIX
San Diego Mortgage and Loans 760-500-1098
37
38 38
Source: S&P 500 from 1983– 2012. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to
client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.
An
nu
al
Retu
rn
S&P 500 Annual Returns
Age
Annual returns of the S&P 500 beginning in 1983 and ending in 2012
Age 62 is assumed to be 1983, 63 is 1984, etc.
16.81%
2.34%
17.62%
-9.85%
0.35%
21.27%
7.06%
-1.54%
34.11%
20.26% 19.53%
-10.14%
-23.37%
26.38%
3.00%
13.62%
3.53%
-38.49%
23.45%
0.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
S&P 500 Annual Return
• Adjustable Rate HECM (ARM) – A HECM which has an interest rate that is subject to change, usually on a monthly or annual basis.
• U.S. Department of Housing and Urban Development (HUD)
• Federal Housing Administration (FHA)
• Home Equity Conversion Mortgage (HECM) – A reverse mortgage insured by the Federal Housing Administration.
• Good Faith Estimate – Lists the approximate closing costs of obtaining a loan.
• HECM for Purchase – A HECM that is used to help finance the purchase of the borrower’s principle residence.
• Lender – A bank or institution licensed to originate residential mortgage loans.
• London Interbank Offered Rate (LIBOR) – The average interest rate that leading banks in London charge when lending to other banks. It is the index used as the basis for Adjustable Rate HECM's.
San Diego Mortgage and Loans 760-500-1098
Glossary of Terms
39
• Line of Credit (LOC) – A HECM disbursement option whereby the borrower receives the loan proceeds in unscheduled payments or installments, at times and in amounts of the borrower’s choosing, until the line of credit is exhausted.
• Lump Sum – Receive all proceeds at loan closing.
• Non-Recourse Loan – In regards to a HECM loan, this term describes the fact that a borrower or their heirs will not owe more than the home is worth when the home is sold to repay the loan.
• Mortgage Insurance Premium (MIP) – Protects the borrower and lender in case the loan balance grows higher than the home value when the loan becomes due.
• Reverse Mortgage – A home loan that allows senior homeowners age 62 and older to access a portion of the equity in their home.
Glossary of Terms (continued)
40 San Diego Mortgage and Loans 760-500-1098
• Servicing – The maintenance of the loan after it is originated. It includes services such as providing regular statements and providing loan disbursements to the borrower as requested.
• Tenure payments – Monthly payments throughout the life of the loan.
• Term payments – Equal monthly payments that are disbursed for a specified amount time.
• Total Annual Loan Cost (TALC) – The projected annual average cost of a reverse mortgage, including all the itemized costs.
• Right of rescission – A three business day time period after a loan closes in which a borrower may change their mind and cancel the loan.
Glossary of Terms (continued)
41 San Diego Mortgage and Loans 760-500-1098