1. (Continued)
The information being shown is for illustrative purposes only. Scenario is a 62-year-old couple, with a home valued at $625,500 and no mortgage, securing a reverse mortgage line of credit (LOC).
LOC will grow at 5.25% above the 1-Year LIBOR (margin = 4% + ongoing Mortgage Insurance Premium of 1.25% = 5.25%). The initial LOC is $266,963; left unused, in 10 years, when they are 72
years old, LOC will have grown to $509,469 in available funds. In 20 years, at age 82, assuming no withdrawals the amount available will be $972,262. The estimates shown are based on a California
property and Reverse Mortgage Funding LLC’s HECM Annual Adjustable Rate Mortgage (ARM) as of 05/03/2016. The initial APR is 5.23%. The loan has a variable rate, which can change annu-
ally. The rate is tied to the 1-Year LIBOR plus a margin of 4%. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. This means that the maximum rate that
could be imposed is 10.23%. This example assumes that the rate remains flat at 5.23%. There is a $0/month servicing fee. In this example, closing costs include an origination fee of $0, third-party
closing costs of $2,762.45, and an up-front FHA Mortgage Insurance Premium of $3,127.50 depending on the appraised value of the property securing the loan. The borrower receives a credit at
closing of $5,764.95. Interest rates and funds available may change daily without notice. Closing costs vary by property state.
“A fiduciary planner has to look out for the best interests of their clients.
As a side effect, the best interests of the planner can be served through
research that shows how the legacy value of assets can be improved by
a reverse mortgage.
”—Wade D. Pfau, Ph.D., CFA, Professor of Retirement Income, The American College
Source: Reverse Mortgage Daily, January 2016
Retirement researchers make a new case
for reverse mortgages
A reverse mortgage could help your clients age 62 and older to effectively leverage an important retirement asset: home equity.
Thanks to significantly lower costs and academic research that demonstrates the value of FHA-insured* Home Equity Conversion
Mortgages (HECMs), reverse mortgages are gaining acceptance as a valuable and effective tool to help satisfy the challenges of
meeting retirement goals for decades.
A growing number of retirement researchers, such as Harold Evensky, John Salter, and Wade Pfau, have conducted numerous studies
to evaluate the pros and cons of a reverse mortgage, along with its potential uses and value in retirement income distribution planning.
These leading researchers have all agreed that the reverse mortgage credit line offers particular value as a tool to improve the
probability of successful client outcomes and legacy value.
HECM Line of Credit: A unique safety net offering a growth feature and flexible repayment
Clients can establish a lower-cost HECM line of credit and draw on it as needed for future expenses, such as healthcare costs. A
unique feature of the HECM line of credit is the amount available to clients will grow monthly, independent of any change in home
value. This feature can provide additional available funds in
future years, which may prove valuable as clients’ savings are
depleted.
With its flexible payment options, a HECM can give eligible
clients more financial control and can help you design more
solutions for your clients. It can serve as an excellent risk
management tool that can help keep productive assets under
your management and help their portfolios last longer.
According to Wade Pfau, “The line of credit provides a way to
create a more efficient retirement income strategy while also
serving as a hedge, if the client’s home value were to fall. It is
essentially a put option on the value of the home.”
