ENCORE Financial's HECM Reverse Mortgage Presentation
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- A Home Equity Conversion Mortgage (HECM) allows homeowners age 62+ to access tax-free cash from their home equity while continuing to live in their home. It provides monthly payments or a line of credit without requiring repayment until the home is sold or ownership is transferred. - HECMs can be used to supplement retirement income, pay off an existing mortgage, or generate additional cash flow. Funds are not taxed and unused balances in a line of credit can grow over time. - Accessing equity through a HECM is an alternative retirement strategy that leverages home equity, diversifies income sources, and allows homeowners to defer claiming Social Security benefits to receive higher monthly payments later in retirement
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ENCORE Financial's HECM Reverse Mortgage Presentation
- 1. Securing Retirement with Home Equity Conversion Mortgages
- 2. For business professional use only. Not intended for distribution to the public.. Agenda HECM Basics Borrower Protections Fees/Costs Product Misconceptions Loan Amounts Accessing Funds Retirement Strategies Right-Sizing the Home
- 3. 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. For business professional use only. Not for consumer distribution. Retirement Planning Using Home Equity Retirement Account & Savings Social Security Home Equity Pension
- 4. For business professional use only. Not intended for distribution to the public. HECM Basics
- 5. What is a HECM? For business and professional use only. Not for consumer distribution. 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. For business professional use only. Not intended for distribution to the public. 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 • Disclosed underage spouse now participates in deferral period
- 7. For business professional use only. Not intended for distribution to the public. 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
- 8. Borrower Protections For business and professional use only. Not for consumer distribution. Non-recourse loan 3rd party counseling Lien-holder not added to title Property satisfies lien Anti-steering regulations Right of rescission
- 9. Program Protections – Repayment Events For business and professional use only. Not for consumer distribution. 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
- 10. Loan Fees For business and professional use only. Not for consumer distribution. 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
- 11. Reverse Mortgage Specific Fees For business and professional use only. Not for consumer distribution. 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)
- 12. Program Misconceptions For business and professional use only. Not for consumer distribution. 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. EquityAvailable(PrincipalLimit) Example: $500,000 Home Value At Age 62, 72 & 82 Source: Liberty Home Equity Solutions, Inc., Quote Packages October 7, 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. 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. For business professional use only. Not intended for distribution to the public. Accessing Funds
- 15. Disbursement Options - Fixed For business and professional use only. Not for consumer distribution. 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.
- 16. Disbursement Options - ARM For business and professional use only. Not for consumer distribution. 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. Example: $500,000 Home Value 62 Year Old Borrower Source: Liberty Home Equity Solutions, Inc., Quote Packages October 7, 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. Line of Credit growth over the course of 30 years LIBOR Disbursement – Line of CreditAvailableLineofCredit $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. 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. TotalPaymentsReceived $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. For business professional use only. Not intended for distribution to the public. HECM Strategies for Retirement
- 20. Hedge Against Home Declines 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. For business and professional use only. Not for consumer distribution. $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
- 21. 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. 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. Case Study - Deferring Social Security
- 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. 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. MonthlySocialSecurityPayments 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. HECM Options Source: Liberty Home Equity Solutions, Inc., Quote Packages October 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. MonthlyReverseMortgagePayments 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 term w/out LOC
- 24. For business professional use only. Not intended for distribution to the public. 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
- 25. 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. 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. Case Study – Stretching Retirement Account
- 26. Source: Calculations based on assumptions listed on previous slide. 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. AccountBalance 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
- 27. 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. 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. Case Study – Allow Retirement Account Rebound
- 28. Source: S&P 500 from 1983-2012 and calculations based on assumptions listed on previous slide. 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. AccountBalance 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&P500Returns 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
- 29. 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. 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. Case Study – Defer Drawdown Until RMD
- 30. Source: Calculations based on assumptions listed on previous slide. 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. AccountBalance 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
- 31. RIGHT-SIZING THE HOUSE For business and professional use only. Not for consumer distribution.
- 32. 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. 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. 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. 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. 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. 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
- 35. 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) For business professional use only. Not for consumer distribution. Summary
- 36. For business professional use only. Not for consumer distribution. Thank you for your time today! Scott Stockdale Direct: 949.759.7000 NMLS ID 234356 www.EncoreFin.com 17901 Von Karman Ave. Suite 600 | Irvine, CA 92614 © Copyright 2015 ENCORE Financial Loans made or arranged pursuant to California Bureau of Real Estate Broker License #01837399 | NMLS ID# 888205 These materials are not from HUD or FHA and were not approved by HUD or a government agency
- 37. APPENDIX For business and professional use only. Not for consumer distribution.
- 38. Source: S&P 500 from 1983– 2012. 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. AnnualReturn 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
- 39. • 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. For business professional use only. Not for consumer distribution. Glossary of Terms
- 40. • 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) For business professional use only. Not for consumer distribution.
- 41. • 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) For business professional use only. Not for consumer distribution.
Editor's Notes
- Thank you for taking the time to learn a few basics about Home Equity Conversion Mortgages . This presentation is intended to answer the most basic questions about reverse mortgages and our focus will be on the FHA home equity solution more commonly known as a HECM Our intent is to provide trusted advisors with enough education about the product, in order to advise your clients (should they meet the certain criteria and have an appropriate need). The presentation includes several scenarios where a HECM might be appropriate in a financial plan for a client. I am _________ of _________ and I specialize in assisting older Americans and their advisors with income solutions. (For CE) If this presentation is for CE credit, please follow the procedures required for documenting attendance such as: Start Time End Time
- For today’s presentation, we will be covering several topics including: HECM Basics Borrower Protections Fees/Costs Product Myths Accessing Funds Loan Amounts Retirement Strategies using home equity and Right-Sizing the Home
- You are well aware of the 3 common legs in a successful retirement plan: Social security, pension and retirement account and personal savings. There is another option available that can be used for both clients who don’t have enough saved for retirement or as a safety net/diversification option for those whose retirements are sufficient. This other option is home equity and it can be the 4th leg in a successful retirement plan….. This supplement to retirement planning can improve the financial projections for your clients. As we will discuss shortly, the HECM mortgage can be used for deferring social security, extending a portfolio, adding to monthly income, or assist in relocating a client to a more appropriate home. It truly is a new day in retirement planning.
- Let’s start today with a quick review of some of the basic requirements of a home equity conversion mortgage
- 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 include: Improves monthly cash flow by eliminating debt No monthly mortgage payments due Loan proceeds are tax-free Heirs inherit any remaining equity Net proceeds can be accessed in multiple ways Interest may be tax deductible when HECM is repaid
- To be eligible for a HECM, there are certain eligibility requirements. These requirements include: 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
- Borrowers must complete 3rd party HUD counseling session before the HECM loan application can be processed. Homeowners must maintain the property to FHA requirements. Borrowers must continue to pay property and homeowners insurance. Lending limit is $625,500. the home value can be more than that amount but they can only borrow up to that amount. The HECM loan must always be in first lien position.
- There are also several borrower protections that HUD has put into place to protect your eligible clients. These protections include: Non-recourse loan: All HECM loans are non-recourse loans, meaning that the terms of the loan will remain in effect until a repayment event occurs. Once a repayment event occurs, the value of the property will satisfy the lien if the home is sold (a transfer of title to heirs is considered a sale). 3rd party counseling: Borrower must complete counseling from an independent HUD-approved HECM counselor. Lien-holder not added to title: Lender will not be added to the borrower’s title. The clients will maintain ownership throughout the life of the loan Property satisfies lien: The borrower’s will not owe more than the value of their home: If they move they must sell the property for the property to satisfy the lien, if they choose not to sell they will owe the entire balance. If they pass, the transfer of title to heirs is considered a sale Anti-steering regulations: Originators and counselors are bound by anti-steering regulations to help ensure the borrower is presented with the most appropriate options Right of rescission – Borrower has 3 days after closing to change their minds on the loan. If a borrower rescinds loan, loan will not fund, but certain fees, such as appraisal, 3rd party closing costs, etc. will still need to be paid.
- HUD has also defined the circumstances that would require the repayment of the loan. The first one is when the last borrower no longer uses the home as a primary residence. Today, the most common reason a loan becomes due and payable is because the borrower does not pay their property taxes or homeowners insurance. Recent changes to the program have been implemented to mitigate this issue. A second reason that the loan will become due and payable is because the last borrower on the loan no longer uses the property as their primary residence. If the property taxes and homeowners insurance remain current, then having the loan become due and payable because of occupancy is a common reasons. Occupancy issues can come from the borrowers deciding to move, passing away, or even going into a care facility. If the last borrower on title moves into a nursing home for more than 6 months, technically the loan would become due and payable. The last reason does not come up very often, but if the borrower fails to keep their home up to FHA standards then they would be required to make the additional repairs/cleanup or the loan would be called due.
- Loan Origination Fee The calculation to determine is 2% of first $200k, 1% of remaining home value; maximum $6,000. This amount can be can be credited in whole or part by lender/broker 3rd Party Closing Appraisal, flood certification, title Costs insurance, notary, courier, recording, etc. Average 3rd Party Varies, depending on state/county Closing Costs
- There are two types of reverse mortgage specific fees, counseling and mortgage insurance premium (MIP): Counseling the fee for counseling is determined by the counseling agency. Fees typically range between $75 and $125. However, HUD does provide some grant support, so it is possible to get for free As we mentioned earlier, HECMs are non-recourse loans and the value of the home will always satisfy the lien. To provide this protection, the FHA pays claims out of an insurance fund. The money for the fund comes from mortgage insurance. Mortgage insurance is assessed two ways. One way is ongoing MIP. The ongoing MI is currently 1.25% annually of the loan balance, assessed monthly. The other mortgage insurance is Upfront MIP. There is currently a calculation that determines the amount of upfront MIP assessed. Depending on the initial disbursement at closing and during the first 12-month disbursement period, they will be assessed either .5% or 2.5% of their max claim amount. As an example, if your client has a home worth $500,000, no existing liens against the property and the initial disbursement requires a 0.50% MIP, the upfront MIP would be $2,500 (.5% X $500,000).
- In our line of business we commonly run into many misconceptions about the product. I want to take a quick minute and address some of the more common ones: Myth # 1: The lender owns the home - Borrower retains title to home, no one is added Myth #2: The home must be free and clear of existing liens - HECM designed to pay off existing liens Myth #3: Loan proceeds are taxed - HECM proceeds are considered a loan, therefore not taxed Myth #4: There are restrictions on how to use proceeds - Any proceeds remaining after paying off liens can be used however the borrower wants, no restrictions Myth #5: Only poor people need HECMs - HECMs provide an opportunity to diversify a portfolio and provide help ensure against overdrawing existing retirement assets
- Before moving into some of strategies using HECMs, lets take a quick look at how much your client could get. The amount of equity available is based on the value of the home, the current interest rate environment and the age of the youngest borrower on title. Because age is based on the IRS life expectancy tables, the older someone is, the higher percentage of equity they would be allowed to borrow. You see here, if your client has a $500k home, after being assessed the fees, a 62 year old client would still be able to access $263k, a 72 year old could get more than $287k and an 82 year old would be over 310k. In addition, not all funds are available right away. HUD has implemented certain restrictions on accessing some of the funds available for the first 12 months. Now, while a borrower does get access to more equity as they get older, this doesn’t mean that the best strategy is to wait to get the HECM and I’ll show you why in a little bit.
- Let’s shift our focus a little and begin talking about ways your clients can access the equity in their homes.
- 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.
- Lump Sum The client has the ability to draw some cash at closing Line of Credit Unscheduled payments or in installments, at times and in an amount of borrowers choosing until the line of credit is exhausted. Does not add to loan balance until used. Available amount of borrowing power can grow. Tenure Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. Term Equal monthly payments for a fixed period of months selected. Combination: The client can choose 1, 2 or all 3 options (considered modified term/modified tenure when using LOC & monthly disbursement option together) to meet multiple financial needs.
- There are two things I want to point out on this slide specifically. First is the growth of the line of credit. HECMs use a specific formula to determine the amount that the line grows. This example assumes no increase in the LIBOR rate over the next 30 years. If the LIBOR rate goes up, so too will the rate at which the line of credit grows. You can see here that at age 62, after net closing costs of just over $10,500, the client would have a line of credit greater than $252k. Assuming the client doesn’t use the line, 10 years later it would be worth approximately $364k, after 20 years it would be approximately $525k and after 30 years it would be approximately $760k. If you think back to the slide where I said it may not be in the client’s best interest to wait, here is a perfect example. Using the same numbers as before, if your client waits until they are 82 to get the reverse mortgage, their LOC would be about 300k (after net closing costs, etc.). As you can see here, the client that got the HECM at age 62 would have approximately $525k in their LOC. Which number provides the bigger safety net?
- The next item I want to discuss is the tenure payment option. With a tenure payment, your client can receive a guaranteed monthly deposit into their bank account as long as the borrower meets their loan obligations. Given a 62 year-old borrower with a $500k home, they can receive $1,453/month. After 10 years they would have received disbursements totaling nearly $175k, almost $350k after 20 years and more than $520k after 30 years. There is also no limit to how long these disbursements will be made. As long as your client meets the HECM requirements (primary residence, current on tax & insurance, maintains home to FHA standards), the disbursements will continue for the life of the loan.
- Now that we know how loan amounts are determined and what options your clients have to access their equity, I want to show you some retirement strategies using home equity.
- One of the most common reactions I get when I speak to financial planners about a reverse mortgage is ‘Why wouldn’t I just have my clients get a HELOC instead?’ That is a great question. Assuming that you are familiar with the basics of a HELOC loan, I want to point out some of the specific advantages the HECM LOC has. First, there is no specific draw period for the HECM. No monthly mortgage payments are required and as we discussed earlier, there are specific circumstances that cause the loan to become due and payable. Until that time, your clients can continue to use their LOC as they wish, assuming they haven’t used all available proceeds. The second potential benefit is the housing market risk. With a HECM, the available line of credit is not tied to the home value whatsoever. The LOC will continue to grow even if the home value drops below the loan balance.
- The first strategy I want to discuss is deferring social security. Your clients are 62 years old and cannot work due to health issues. They have $200k in their retirement account and are relying on social security to make up the difference. Their home is worth 500k and do not owe anything on it. If they claim social security now, will they have enough to live out their retirement? A possible solution is to increase their cash flow using HECM proceeds.
- Here you can see what these clients would receive by the age they claim social security. This information was pulled directly from a calculator on the AARP website. Given the numbers, these clients would get $1,958 per month if they claim at age 62, $2,437 at age 65 and $3,447 if they can wait until age 70 to claim social security.
- This slide shows how a HECM can help the clients get their full social security draw, but still retire now. If they use the tenure feature of a HECM, they can get $1,453 per month. If you add the $1,958 they could also get from social security, that comes to $3,411 per month, which is very close to the $3,447 they get if they wait. The biggest downside of this option is that the tenure payment is tied to the home and as soon as the HECM becomes due and payable, the payments stop. If your client can survive on the initial social security draw, but will need more in the future because of cost of living expenses, you could set them up with an 8 year term payment of $2,016, so they are getting a little more than the early SS draw. After 8 years the term payments would stop, but your clients would be 70 and could claim full social security. In addition, this option gives them a $100k line of credit that can be used for whatever they want. If they don’t need/use it, the amount will continue to grow over time. The last option would be to go with the 8 year term without a line of credit. That gives your clients $3,338 per month for 8 years. At the end of the term they could claim a full SS draw. This basically gives them a full draw amount at age 62.
- 3 options were considered. One: Take SS early-at 62- and rely on investments only. Second: Defer SS to age 70 and rely on investments only. Third: Defer SS to age 70 AND use 8 year term payments from HECM to fund years 62-70 while social security is deferred. Result of deferral strategy + HECM: Probability of client meeting goal is increased to 99%
- Our next case study involves using home equity to stretch the amount of time that a retirement account can continue to provide for living expenses, etc. This client is 62, has $500k in a retirement account, a home worth $500k and they do not owe a mortgage on it. These clients will need, in their first year of retirement, their social security draw plus an additional $40k. We assume that their cost of living will go up by 3% annually and that they are in the 15% tax bracket. I also used historical S&P 500 returns as my assumed rate of return for the retirement account. This scenario will show the difference between not using home equity and using home equity to cover the increased cost of living expenses so that the drawdown from the retirement account remains constant.
- The green chart shows what would happen to the retirement account without accessing home equity. The blue chart shows a constant drawdown of $40k per year, with the cost of living increase being covered by the HECM LOC. By reducing the amount needed to be taken out of the account, the retirement account can more fully appreciate during up years in the market, helping it last significantly longer. In this situation, without the HECM, the client runs the risk of being out of funds by age 80 or so. With home equity, their retirement account may still be in excess of $600k at age 93.
- The next case study will show what can happen if you allow a retirement account to rebound after down years. Using the same client facts and assumptions as the previous study, this scenario will show what can happen if, during down years in the market, your clients living expenses are taken from a LOC setup through the HECM rather than being drawn down from the retirement account.
- The red lines on this chart show the annual S&P 500 returns assumed through retirement. The bar chart represents the value of your client’s retirement account. The blue lines are years where living expenses will be drawn down from the retirement account. The green lines are years where living expenses will be drawn from the LOC. At age 93, in addition to funds remaining in the retirement account, there is more than $400k left in the LOC.
- Our final retirement strategy involves your client’s required minimum distribution. The client facts and assumptions are the same as the previous scenarios. The solution is to use HECM funds to delay draws from the retirement account until your client reaches the required minimum distribution age.
- Here your can see our typical redline graph showing what happens without using home equity. With the blue line, we covered living expenses using the proceeds from a HECM for as long as possible, with the goal of not accessing the retirement account funds until required minimum distributions were necessary. With this scenario, the HECM proceeds actually lasted through age 68, so not quite long enough to make to RMD age, but long enough to allow for the retirement account to grow for another 6 years. Once age 69, all living expenses were drawn out of the retirement account. Once your client reached RMD age of 70.5, the required minimum distributions were factored in to the annual withdrawals. In ages 78-89, the RMD was higher than what was necessary for living expenses. In those situations, the RMD was withdrawn from the retirement account and the amount remaining after covering living expenses was paid back into the HECM. This created two benefits for your clients. First, it lowered the amount owed and second, because of the way HECM LIBORs work, it automatically increased the LOC as well. From ages 78-89, a total of $279k was paid back into the HECM. With the current growth rate associated with the HECM LOC, there would be over $415k in the LOC at age 93. In addition, because the account was allowed to grow, uninterrupted, between ages 62-68, there is still more than $770k in the retirement account as well.
- The last scenario I want to discuss is right-sizing the house. Many seniors either want, or need to, relocate to a new home and the HECM program can help.
- Lets review a specific example to help bring everything together. For this example, we will use a 70 year old borrower. Their home is worth $500k and they do not owe a mortgage currently. The home they would like to buy is worth $350k and they do not want a monthly mortgage payment on the new home.
- If they sell their current home for $500k, we’ll say that the selling fees, assuming 8% in fees, (commissions, taxes, etc.) are $40k, netting them $460k. If they purchase the new home for $350k, they have $110k left in remaining funds. In this scenario, we’ll also assume that the seller paid all closing costs, fees, etc.
- Now, if they use a HECM for purchase to buy their home, they will still start with the same $460k in net proceeds from selling the existing property. The new home price is still $350k. In this scenario, the HECM for Purchase will cover $197,400 and the borrower will have to bring $166,853 to closing. That leaves the borrower over $290k in their account as opposed to just $110k. That additional $180k can be used however the borrower wants, from a safety net, to additional investments to possibly a vacation property.
- This presentation has introduced you to the HECM mortgage, an FHA insured loan used for accessing home equity. This product is not for everyone but when it is appropriate, it may be an extremely useful tool for retirement planning, We have illustrated several applications for this product and also discussed some common misconceptions. In summary, it is ….. (Emphasize the blue bullets)
- (This slide allows for the instructor to paste his personal contact information. No other adds are permitted) Should you have follow up questions we have not covered in this session, please feel free to contact me . Thank you for your time today. Questions? (Note: Complete CE credit “paperwork” if needed)