N4A HECM Intensive July 18, 2010 Home Equity Conversion Mortgage – HECM Basics
Reverse Mortgages in Retirement Income Planning€¦ · 14 HECM (FHA insured) is non-recourse, the...
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1 Reverse Mortgages in Retirement Income Planning John Salter, PhD, CFP®, AIFA® Associate Professor of Personal Financial Planning, TexasTech University Wealth Manager , Partner, Evensky & Katz/Foldes Financial Wealth Management
Transcript of Reverse Mortgages in Retirement Income Planning€¦ · 14 HECM (FHA insured) is non-recourse, the...
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Reverse Mortgages inRetirement Income Planning
John Salter, PhD, CFP®, AIFA®
Associate Professor of Personal Financial Planning, Texas Tech UniversityWealth Manager, Partner, Evensky & Katz/Foldes Financial Wealth Management
Large part of baby boomer’s net worth.
Asset that is largely unused in traditionalretirement income planning.
Asset that may not be able to be ignored inthe future.
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Way to convert home equity to a useableresource – a mortgage in reverse.
Lender provides benefit based on homeequity, payback is optional.
Home Equity Conversion Mortgage (HECM) -Insured by FHA
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One borrower should be age 62 or older.
Pay taxes and insurance.
Maintain home.
Current mortgage must be paid off orrefinanced into HECM.
Must be primary home and currently lived in,can be out 365 consecutive days.
Single family property, HUD-approvedcondo, or up to 4-unit home.
Borrower must complete counseling prior toclosing.
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Prior, there was no credit or asset check.
Nearly 10% of reverse mortgages were in taxand insurance default.
Most likely will be more formal credit checkand test for assets related to paying taxesand insurance.
No longer a “last resort?”7
Tenure- equal monthly payments for life aslong as in home
Term- equal monthly payments for a fixedperiod of time
Line of Credit- unscheduled payments or ininstallments
Combo of the above!8
The amount of home equity available basedon certain factors up to the home value limit$625,500.
Think loan to value ratio, but home value inratio capped at limit.
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Calculated using following factors
Age of the youngest borrower
Older yields higher benefit
Lender Margin
Higher margin, decreased initial PLF
Interest rates
Lower expected rates (expected) yields higher benefit
Currently based on 10-year LIBOR swap rate
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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 – Shop around
Some lenders flat rate, some decrease originationwith increased margin.
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Combination of
FHA Mortgage Insurance Premium = 1.25%
Lender Margin = currently 2.25 to 4%
LIBOR rate = variable, currently 0.2%, geometricaverage = 2.8% OR fixed rate
Today, would equal ~ 3.7 - 4.95%12
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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 for $20
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HECM (FHA insured) is non-recourse, the borroweror their estate will never owe more than the value ofthe home upon sale or death.
The loan can not be called/cancelled as long asrequirements are met.
Unused line of credit grows over time.
Can refinance if terms become better (upfront feesapply just as refinancing a traditional mortgage)
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HELOC ReverseMortgage
Line growth? No Yes
Cancelable? Yes No
Requires repayment? Yes No
Age restriction? None 62
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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, bankowns home
Mobility risk
Cost sensitivity.
Misunderstanding the product.
Compliance has been a big issue.
A fiduciary duty?
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Last resort reversed Manage sequence of return risk Refinance a mortgage/Eliminate payments Replace a HELOC Purchase a Home Defer Social Security Create Income Alternative to Longevity Insurance?
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Should a line of credit be taken out today andnot used until later, or wait for portfolio todeplete then open a line of credit?
Issues:
Cost – if not needed one didn’t need to be set up.
Age – larger amount available when older.
Interest rates – very low today, uncertaintomorrow.
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Years Now-Low Late-Low Late-Mid Late-High
20 99.8% 97.0% 94.5% 92.4%
30 91.4% 66.2% 63.1% 60.7%
*Based on 5% real withdrawal rate.
Answer? Take out a line of credit today andwatch it grow!
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InvestmentPortfolio(Bucket)
Cash FlowReserveAccount(Bucket)
Retirement Living Expenses
Refill whenrebalancing,
makingchanges Standby RM
(Bucket)
Borrow inbear market
and cashdepleted
Paybackwhen
portfolio backto acceptable
or when CFRaccount isdepleted,portfolio
acceptable
Goal – to avoid selling assets in bear markets Strategy – standby reverse mortgage
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If portfolio above glidepath mark (80%)
Refill cash when rebalancing, investment changes
Cash bucket empty, refill from portfolio.
LOC balance > $3,000 repay then refill.
If portfolio below glidepath mark (80%)
Have cash, need to rebalance, only rebalance
Cash bucket empty, borrow from LOC
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Currently a popular reason for taking out areverse mortgage.
Current mortgage is refinanced into thereverse mortgage to stop payments for cash-strapped retirees, payments are not required.
Loan builds over time and sale proceeds payloan upon death or sale (or heirs pay to keepthe house). 25
Based on earlier slide, simply replace atraditional HELOC.
HECM LOC
No payback required
Credit line cannot be reduced, actually grows.
Cannot be called or cancelled.
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HECM for Purchase
HECM proceeds can be used as a downpayment.
Payback optional over time.
*Strategy has not yet been simulated in research.27
HECM term payments can be used to fill inthe gap of income in order to defer SocialSecurity.
Particularly useful for those not financiallyable to defer.
*Strategy has not yet been simulated in research. 28
The Standby methodology was aimed atincreasing the probability of clients meetinggoals,
For the same probability, can a client spendmore?
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Tenure payments provide an increased cashflow.
Debt builds over time as payments are made.
Can increase spending ability forunderfunded retirees.
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• Sample Client: 62 years old, $250,000 home, $500,000 portfolio
Simulate longevity insurance (aka deferredSPIA, deferred income annuity).
Initiate LOC today, convert to tenurepayment later. Asset control is never givenup to insurance company through premium.
Risk of needing to leave the home.
32*Strategy has not yet been simulated in research.
Standby/Use Later example.
Refinance example.
Needed to use standby example.
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Once I was educated, the ideas opened up!
There is nothing wrong with the product, onlypast use and behavioral issues.
Home equity can and will be an importantpart of the retirement income puzzle.
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