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5/30/18
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ReverseMortgageInsightsfromaFellowFinancialPlanner
JohnSalter,PhD,CFP®,AIFA®
AssociateProfessorofPersonalFinancialPlanning,TexasTechUniversityWealthManager,Partner,Evensky&Katz/FoldesFinancialWealthManagement
¡ Largepartofbabyboomer’snetworth.
¡ Assetthatislargelyunusedintraditionalretirementincomeplanning.
¡ Assetthatmaynotbeabletobeignoredinthefuture.
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¡ Waytoconverthomeequitytoauseableresource–amortgageinreverse.
¡ Lenderprovidesbenefitbasedonhomeequity,paybackisoptional.
¡ HomeEquityConversionMortgage(HECM)-InsuredbyFHA
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¡ Oneborrowershouldbeage62orolder*.
¡ Paytaxesandinsurance.
¡ Maintainhome.
¡ CurrentmortgagemustbepaidofforrefinancedintoHECM.
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¡ Mustbeprimaryhomeandcurrentlylivedin,canbeout365consecutivedays.
¡ Singlefamilyproperty,HUD-approvedcondo,orupto4-unithome.
¡ Borrowermustcompletecounselingpriortoclosing.
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¡ Prior,therewasnocreditorassetcheck.
¡ Nearly10%ofreversemortgageswereintaxandinsurancedefault.
¡ Mostlikelywillbemoreformalcreditcheckandtestforassetsrelatedtopayingtaxesandinsurance.
¡ Nolongera“lastresort?”6
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¡ Tenure-equalmonthlypaymentsforlifeaslongasinhome
¡ Term-equalmonthlypaymentsforafixedperiodoftime
¡ LineofCredit-unscheduledpaymentsorininstallments
¡ Combooftheabove!7
¡ Theamountofhomeequityavailablebasedoncertainfactorsuptothehomevaluelimit$679,650.
¡ Thinkloantovalueratio,buthomevalueinratiocappedatlimit.
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Calculatedusingfollowingfactors
¡ Ageoftheyoungestborrower§ Olderyieldshigherbenefit
¡ LenderMargin§ Highermargin,decreasedinitialPLF
¡ Interestrates§ Lowerexpectedrates(expected)yieldshigherbenefit§ Currentlybasedon10-yearLIBORswaprate
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¡ Mortgageclosingcosts§ Titleinsurance,appraisal,attorneyfees,etc,etc…
¡ MortgageInsurancePremium(FHA)=2%▪ Exceptionif>60%PLFisusedinfirstyear,then2.5%
¡ Originationfee–Shoparound§ Somelendersflatrate,somedecreaseoriginationwithincreasedmargin.
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¡ Combinationof
§ *FHAMortgageInsurancePremium=0.5%
§ LenderMargin=currently2.25to4%
§ LIBORrate=variable,currently2%,geometricaverage=2.8%ORfixedrate
§ Today,wouldequal~4.75–6.5%11
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¡ Nomonthlyprincipalorinterestpaymentrequired
¡ Proceedsaretax-free¡ Interestdeductiblewhenpaid(anditemizing),interestpaybackisfrontloaded
(Pleaseconsultataxadvisor)
¡ Benefittypecanbechangedfornominalcharge.
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¡ HECM(FHAinsured)isnon-recourse,theborrowerortheirestatewillneverowemorethanthevalueofthehomeuponsaleordeath.
¡ Theloancannotbecalled/cancelledaslongasrequirementsaremet.
¡ Unusedlineofcreditgrowsovertime.
¡ Canrefinanceiftermsbecomebetter(upfrontfeesapplyjustasrefinancingatraditionalmortgage)
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HELOC ReverseMortgage
Linegrowth? No Yes
Cancelable? Yes No
Requiresrepayment? Yes No
Agerestriction? None 62
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¡ Theyaren’tfree
¡ Misuseorilladviseduse–badpress
¡ Stigmaofusingthehomevalue;debt
¡ Misconceptions–I’lllosemyhome,bankownshome
¡ Mobilityrisk
¡ Costsensitivity.
¡ Misunderstandingtheproduct.
¡ Compliancehasbeenabigissue.
¡ Afiduciaryduty?
¡ Thinkofthedebtimpacts.
¡ Changes!!! 16
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¡ Up-FrontMIPupto2%from0.5%.§ Cost1.5%moreup-fronttoimplement.
¡ On-goingMIPdownto0.5%from1.25%.§ Helpsloanvalueaccumulation,hurtslineofcreditgrowthrate.
¡ LowerPLFs§ Lessavailableup-front. 17
¡ Lastresortreversed¡ Managesequenceofreturnrisk¡ ReplaceaHELOC¡ Refinanceamortgage/Eliminatepayments¡ PurchaseaHome¡ DeferSocialSecurity¡ CreateIncome¡ AlternativetoLongevityInsurance?
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For illustration purposes only!!!
¡ OPTIONAAverage
Return:6.8%Standard
Deviation:3%
¡ OPTIONBAverage
Return:6.8%Standard
Deviation:12%
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For illustration purposes only!!!
¡ OPTIONAAverage
Return:6.8%Standard
Deviation:3%
¡ OPTIONBAverage
Return:6.8%Standard
Deviation:12%
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0%
1%
2%
3%
4%
5%
6%
7%
8%
0% 5% 10% 15% 20% 25%
Risk *Data from MoneyGuide Pro Assumptions
LOC Growth Rate 3.5% Margin, 0.5% MIP, 2.8% LIBOR
Ret
urn
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¡ Standby/UseLaterexample.
¡ Refinanceexample.
¡ Homerepairsexample.
¡ “Talking”aclientintothis.
¡ Neededtousestandbyexample.23
Questions?
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