Modeling Home Equity Conversion Mortgages (HECMs) in ... · 10/25/2018 · HECM is reverse...

Modeling Home Equity Conversion Mortgages (HECMs) in MoneyGuidePro®

Timothy R. Jackson

Head of Financial Planner Education & Support

Financial Advisor Channel

Reverse Mortgage Funding, LLC

973.970.3120

tjackson@reversefunding.com

PRESENTED BY:

© 2018 Reverse Mortgage Funding LLC, 1455 Broad St., 2nd Floor, Bloomfield, NJ 07003. Company NMLS ID # 1019941. These materials are for general information purposes only and are not for use with individual consumers or for distribution to the general public. The information herein is not intended as legal, tax or financial planning advice and should not be relied on or construed as such. These materials have not been reviewed, approved, or issued by FHA, HUD, or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency. LXXXX-ExpXXXX

Christian Mills

Financial Planner Channel

HECM Specialist

Reverse Mortgage Funding, LLC

720-984-6622

cmills@reversefunding.com

2RMF Highlights1 of every 5 FHA-Insured Reverse Mortgages

04RMIT, our parent company, has raised approximately $300 million from institutional investors since 2014

Well capitalized, with broad institutional support

Managed the market-leading reverse mortgage business

Leadership: Former MetLife Bank executives

NATIONAL LENDER

22.8% of the wholeloan market share in 2017*

Education. Origination. Servicing oversight. Securitization.

Fully integrated reverse mortgage finance company

*Source: Year-End 2017, Whole Issuance Amounts by GNMA Issuer, GinnieMae.gov.

99% of Reverse Mortgages are HECMs Or “Home Equity Conversion Mortgage”

HECM is reverse mortgage insured by the U.S. Federal Government*

President Reagan—FHA Insurance*

HECM program started in 1989

Over 1 million Americans have used a HECM

*This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.

Source: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmhome

580,238Households

Insurance Premiums

FHA Insurance Fund† Guaranteed Income &

Non-recourse

*Not tax advice. Consult a tax professional.†This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.

The HECM Program

2nd1st

Guaranteed Income

$500,000 Home Value$300,000 HECM LOC Value Drops

$100,000 Home Value

Home value $100,000

$300,000.00 HECM LOC Remains

Guaranteed Income

$100,000 Home Value$300,000 HECM LOC

Withdraws $300,000 from HECM LOC

300,000.00

Three Hundred Thousand 00/00

HECM Insured Client’s Checking Account

Non-recourse

Client Sells Home $100,000 Client Pays Lending Institution

$100,000

-$200,000 Shortfall Paid by the “Pooled-Risk Insurance”

100,000.00Lending InstitutionOne Hundred Thousand 00/00

By John Salter, Ph.D., CFP®, AIFA®; Shaun Pfeiffer; and Harold Evensky, CFP®, AIF®

Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions

Source: John Salter, Shaun Pfeiffer, and Harold Evensky. 2012. “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions.” Journal of Financial Planning 25 (8): 40–48.

9Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement (2nd Edition)

“Initiating the reverse mortgage earlier and then coordinating spending from home equity throughout retirement offers a way to meet spending goals and provide a larger legacy.”

“That is the ultimate goal of retirement-income planning: using assets to allow for more income and/or a larger legacy.” Wade D. Pfau, Ph.D., CFA

Professor of Retirement Income, The American College

Source: Advisor’s Perspectives, December 1, 2015

104 Common HECM Uses by Trusted Advisor Clients (2017)

Purchase NewHome

Monthly Payment

EliminateMortgage Balance

Standby Line ofCredit

0% 20% 40% 60% 80%

60% Credit Line

*As with any home-secured loan (or mortgage), the borrower must meet their loan obligations, keep current with property taxes, insurance, maintenance, and any homeowners association fees.Source: Total loans funded in 2017 by RMF Financial Advisor Channel.

1ST COMMON USE

Impact of HECM’s on 62 Year Old with a Mortgage

• Age: 62 Years Old Couple• Assets: $1,000,000 IRA MoneyGuidePro default rates of return• Income: $37,500 Social Security Income for both• Life Expectancy: 91 & 93 Years Old • Core Living Expenses: $72,000 for both ($54,000 for survivor)• Mortgage: $100,000 Balance

3.92% Rate for 120 months (10 years)$1,009 monthly payment

Impact of HECM’s on 62 Year Old Client’s Probabilities

• Payoff $100,000 Mortgage • Eliminate $1,009 monthly principal and interest payment

• HECM Tenure Payment $719.25

Mr. and Mrs. Mortgage Phase 2: Move Close to Children

❶ Sale Home #1:Net $750,000

❷ Buy Home #2:Price $400,000

Impact of HECM’s on 62 Year Old Client’s Probabilities

• Sell home for $750,000 • Pay off $100,000 mortgage and $50,000 in realtor fees/transfer tax• Client is left with $600,000 from the sale of their property• Purchase new House for $400,000 with $200,000 down• Finance 50% of home with HECM for Purchase• Reduced basic living expenses by $6,000• Take $400,000 from sale of primary residence to add to portfolio

18Optimal Strategy for Mr. and Mrs. Mortgage

Home #2 Price $400,000Home #1 Proceeds: - $200,000HECM for Purchase: $200,000

NO Payments Required Reduce basic living expenses $500 a month Excess Home Proceeds $400,000

❸99%

Probability of Success

2ND COMMON USE

21Buying a Home with a HECM

HECM forPurchase

$376,684

$302,965

$376,684

$302,965

Option A Option B

65-Year-Old Couple Buying a $679,650 Condo

Not available in all states. Certain conditions and fees apply. The information being displayed is for illustrative purposes only. Assumptions are: (1) 65-year-old borrower; (2) OH home purchase value is $679,650; (3) HECM Fixed as of Nov. 3, 2017; (4) The initial interest rate is 4.30%; (5) Initial Cash from Borrower is $351,768; (6) Initial Draw from HECM is $284,382; (7) Annual Percentage Rate (APR) is 4.30%. Maximum Annual Percentage Rate (APR) is 4.30%. Rates and funds available may change daily without notice. This down payment range assumes closing costs will be financed into the loan. The information being displayed is for illustrative purposes only. Actual cash required may vary and is based on age of youngest borrower, interest rate, home value, and other factors.

3RD COMMON USE

Inception Year 20 Year 30

$221,242

$851,048

HECM Line of Credit (LOC) Growth*62-year-old client with $679,650 Home Value in PA

NOTEWORTHY: Line of credit is still in-force if one borrowing spouse must move to care facility, provided other spouse remains in the home. The line also remains in-force if one spouse pre-deceases the other, with same condition.

Not available in all states. Certain conditions and fees apply. Information shown for illustrative purposes only. Assumptions are: (1) 62-year-old borrower; (2) PA home valued at $679,650; (3) LOC will grow at .5% above the interest rate for an Adjustable Rate Mortgage (ARM), which uses the 1-Year LIBOR plus a margin of 4.50%. The initial interest rate is 6.689% which can change annually. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.689%; (4) the growth rate remains at 7.53%; (5) Annual Percentage Rate (APR) is 6.65%. Maximum Annual Percentage Rate (APR) is 11.348%; (6)there are no draws taken from the line of credit by the borrower. Borrower pays down any accumulated interest annually. Rates and funds available may change daily without notice. (7) Client pays $4,450 at closing. *If part of the borrower’s loan is held in a line of credit upon which they may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on the borrower’s loan. Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property..

$1,659,815

24Credit Line Growth: How it Works3.125% Lender Margin

.50% MIP3.130% Libor Index6.755%

❶❷❸

$221,242 Available Line:

X 6.755%

$15,416 Growth in Y1

$ 15,416 Growth

+ 221,242 Initial Line

$ 236,658 Available Line Y2Not available in all states. Certain conditions and fees apply. Information shown for illustrative purposes only. Assumptions are: (1) 62-year-old borrower; (2) PA home valued at $679,650; (3) LOC will grow at .5% above the interest rate for an Adjustable Rate Mortgage (ARM), which uses the 1-Year LIBOR plus a margin of 4.50%. The initial interest rate is 6.689% which can change annually. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.689%; (4) the growth rate remains at 7.53%; (5) Annual Percentage Rate (APR) is 6.65%. Maximum Annual Percentage Rate (APR) is 11.348%; (6)there are no draws taken from the line of credit by the borrower. Rates and funds available may change daily without notice. (7) Client pays $4,450 at closing.

Start Early

Not available in all states. Certain conditions and fees apply. Information shown for illustrative purposes only. Assumptions are: (1) 62-year-old borrower; (2) PA home valued at $679,650; (3) LOC will grow at .5% above the interest rate for an Adjustable Rate Mortgage (ARM), which uses the 1-Year LIBOR plus a margin of 4.50%. The initial interest rate is 6.689% which can change annually. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.689%; (4) the growth rate remains at 7.53%; (5) Annual Percentage Rate (APR) is 6.689%. Maximum Annual Percentage Rate (APR) is 11.348%; (6)there are no draws taken from the line of credit by the borrower. Rates and funds available may change daily without notice. (7) Client pays $4,450 at closing. *If part of the borrower’s loan is held in a line of credit upon which they may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on the borrower’s loan.

Start Early Wait Until 72 Wait Until 82

LOC at Age 62 $221,242 — —

LOC at Age 72 $457,481 $241,737 —

LOC at Age 82 $851,048 $499,522 $304,716

LOC at Age 92 $1,669,158 $1,032,204 $629,660

26Clients Can Draw $59,301 Tax Free Funds* from Credit Line in Year 20

X 6.755% = $59,301 HECM LOC Growth

*Not tax advice. Consult a tax professional.

$851,048

Year 20

Deferred HECM LOC

Total Draws over 10 Years: $1,451,051❶$593,010 for 10 Years + ❷Full LOC Draw at End of Year 10

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Age 82 Age 83 Age 84 Age 85 Age 86 Age 87 Age 88 Age 89 Age 90 Age 91

Cumlative of Growth Only Draws COMPLETE LOC Draw EO 10 YR Period

$ 858,041

$ 593,010

$1,451,051

$1,653,335 is Home Value at Age 92

$59,301

Deferred Income Annuity vs. HECM Reverse Mortgage

HECM vs DIA$700,000 Home Value

No Mortgage62 Year Old Couple

Joint Lives Policy

$268,000

$14,950

$59,040

$59,301

$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000

$268,000 DEFERRED INCOME ANNUITY

$14,950 HECM DEFERRED LOC

Deferred Income Annuity vs.Deferred HECM Line of Credit

20 Year Annual Benefit Initial Cost

Source: immediateannuities.com 8/2018

HECM vs DIA$700,000 Home Value

No Mortgage62 Year Old Couple

10 year Period Certain

$499,000

$14,950

$1,172,280

$1,172,880

$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000

DEFERRED INCOME ANNUITY

HECM DEFERRED LOC

10 Years of Cash Flow after 20 Period Initial Cost

Source: immediateannuities.com8/2018

How many of your clients age 62+:

Have no long-term care insurance?

Have no cash reserves?

Have underfunded plans?

Takeaway

4TH COMMON USE

Surviving Spouse ProvisionJack and Beth, both 62-years-old, $679,650 Home Value in PA $514,080

Total Paid over 30 years

Jack Dies in Month 2

Widow continues to receive $1,428* in income-tax-free funds per month

Clients get 1st

Check Month 1

1,428*

*Not tax advice. Consult a tax professional.Not available in all states. Certain conditions and fees apply. Information shown for illustrative purposes only. Assumptions are: (1) 62-year-old borrower; (2) PA home valued at $679,650; The initial interest rate is 6.65% which can change annually. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.65. Annual Percentage Rate (APR) is 6.65%. Maximum Annual Percentage Rate (APR) is 11.348%; Client pays $4,450 at closing. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.

Impact of HECM’s on Client’s Probabilities

• Mr. & Mrs. Delay Social Security• Age: 62 Years Old• Assets: $1,250,000 IRA eMoney default rates of return• $750,000 Primary Residence• Income: $20,808 Social Security Income for both• Life Expectancy: 90 & 90 Years Old • Basic Living Expenses: $85,000 for both

• Mr. & Mrs. Fahey• Age: 62 Years Old• Assets: $1,000,000 IRA eMoney default rates of return• Income: $33,000 Social Security Income for both• Life Expectancy: 90 & 90 Years Old • Basic Living Expenses: $75,000 for both

• Mr. & Mrs. Delay Social Security• Age: 62 Years Old• Assets: $1,250,000 IRA eMoney default rates of return• $750,000 Primary Residence• Delay Social Security Income: $55,440 • Life Expectancy: 90 & 90 Years Old • Basic Living Expenses: $85,000 for both

• Mr. & Mrs. Delay Social Security• Age: 62 Years Old• Assets: $1,250,000 IRA eMoney default rates of return• $750,000 Primary Residence• Income: $20,808 Social Security Income for both• Life Expectancy: 90 & 90 Years Old • Basic Living Expenses: $85,000 for both• Add $17,833 in annual HECM Tenure Payments

• Mr. & Mrs. Delay Social Security• Age: 62 Years Old• Assets: $1,250,000 IRA eMoney default rates of return• $750,000 Primary Residence• Add $24,000 immediate HECM funds• Delay Social Security Income: $55,440 • Life Expectancy: 90 & 90 Years Old • Basic Living Expenses: $85,000 for both

Impact of LTC Expense on Retirement Savings

62-year-old clients with $1.5 MM Retirement SavingsKey Assumption: • 8.38% ROR• 9.13% Std. Dev • 3.97% Inflation • $7,000 Monthly Expense, • $3,600 Monthly SS (Age 66)• LTC Expense for 1 Spouse starts at Age 77.• Total LTC Expense = $459,563 (3 Years).

62-year-old clients with $1.5 MM Retirement Savings

Key Assumption: LTC Expense for 1 Spouse starts at Age 77. Total LTC

Expense = $459,563 (3 Years).

Other Assumptions: 8.38% ROR, 9.13% Std. Dev, 3.97% Inlf., $7,000

Monthly Expense, $3,600 Monthly SS (Age 66)

Age 62Age 77

Age 88Age 93

$1,500,000

$1,469,950

$1,500,000

$1,469,950

$1,076,839

$510,501

$1,500,000

$1,469,950 $1,668,625 $1,654,078

No HECM HECM HECM with Draws

ADVANCED PLANNING STRATEGIES

HECM OPTIMIZER

How many of your clients age 62+:

Are not in the confidence zone?

Have Underfunded Plans?

Takeaway

Now What?

Retirement Risk Worksheet

Required Information:

1. Age of Youngest Client2. Estimate Home Value3. Total Mortgage Debt (if any)4. Zip Code

Get a Free a Client Illustration

Christian MillsFinancial Planner ChannelHECM SpecialistReverse Mortgage Funding LLC720-984-6622cmills@reversefunding.com

50OUR GIFT TO YOU!

HECM Reverse Mortgage Illustration

ADDITIONAL MATERIALS

The Math for Calculating the Money Available

$679,650 Home Value or GREATER

X .319 Principal Limit Factor (PLF)$216,758 Available Principal

Not available in all states. Certain conditions and fees apply. Information shown for illustrative purposes only. Assumptions are: (1) 62-year-old borrower; (2) PA home valued at $679,650; (3) LOC will grow at .5% above the interest rate for an Adjustable Rate Mortgage (ARM), which uses the 1-Year LIBOR plus a margin of 4.50%. The initial interest rate is 6.689% which can change annually. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.89%; (4) the growth rate remains at 7.53%; (5) Annual Percentage Rate (APR) is 6.65%. Maximum Annual Percentage Rate (APR) is 11.348%; (6)there are no draws taken from the line of credit by the borrower. Rates and funds available may change daily without notice. (7) Client pays $4,450 at closing.

PLF Factors Vary with(1) Client Age(2) Expected Rates: Lender Margin + 10-Year LIBOR Swap

FHA-insured* HECM ProgramAvailable for single-family property, HUD-approved condo, or up to 4-unit home (HECM for Purchase not available on multi-unit properties)The home must be their primary residence

Proceeds can be used to refinance a property or purchase a home

Can be used to pay off a first mortgage or HELOC

A HECM cannot be reduced, called or canceled, as long as the terms of the loan are met

Clients downsizing or rightsizing can use a HECM to finance the purchase of their new home

As with any home-secured loan (or mortgage), the borrower must meet their loan obligations, keep current with property taxes, insurance, maintenance, and any homeowners association fees. As long as these obligations are met, the loan does not have to be repaid until the last surviving borrower (or qualified non-borrowing spouse) passes away, sells the home or moves out.

*This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.

How Reverse Mortgages Work

The percentage of the house value that can be borrowed (Principal Limit Factor) = a function of borrower’s age (+) and the loan’s interest rate (-). Typically 30%-70% of house value.

The house value = the lesser of the appraised value of the property or the maximum loan amount for that area of the U.S. (currently $679,650 nationally).

Decision: Seek Counseling

Homeowner over the age of 62

Decision: Apply for HECM

Learn about HECM options

Decision: Get HECM

• Appraisal Then• Choose terms

and up-front draw

Manage HECM

• Withdraw $• Pay taxes and

insurance & withdraw funds

Decision:Terminate

• Mortality• Mobility

• Refinance• Foreclosure

Reverse mortgages are non-recourse loans (borrower can never owe more than the appraised value of the home at time of repayment)

Advance loan disclosures and loan illustrations are provided at time of application

Counseling is required for all HECM applicants –provided by HUD, AARP & other reputable orgs.

How Are My Clients Protected?

NOT FOR CONSUMER USE

This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.

©2018 Reverse Mortgage Funding LLC, 1455 Broad Street, 2nd Floor, Bloomfield, NJ 07003, 1-888-494-0882. Company NMLS ID: #1019941 (www.nmlsconsumeraccess.org). Arizona Mortgage Banker License #0927682; Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; Loans made or arranged pursuant to a California Financing Law license; Georgia Mortgage Lender Licensee #36793; Illinois Residential Mortgage Licensee; Massachusetts Mortgage Lender License #ML1019941; Licensed by the New Jersey Department of Banking & Insurance; Rhode Island Licensed Lender; Texas Mortgage Banker Registration in-state branch address 6044 Gateway East, Suite 236, El Paso, TX 79905. Not intended for Hawaii and New York consumers. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. LXXXX-Exp022019

Modeling Home Equity Conversion Mortgages (HECMs) in ... · 10/25/2018 · HECM is reverse...

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