When a spouse is not a borrower in a HECM transaction, he or she is referred to as a non-borrowing spouse (NBS). This is often due to the spouse not meeting the age requirement of 62. Understanding Reverse-2021

A non-borrowing spouse (NBS) is the spouse of a reverse mortgage borrower that will not be a borrower. But the guidelines are not that simple and are commonly misunderstood.  Let’s see if I can explain the rules, and why they were created.

The Problem:

Some spouses are not included in the reverse mortgage. Although there are many reasons for this, in most cases this is because they are not old enough (age 62).

Regardless, prior to 2014, these non-borrowing spouses had little protection after the death of the last borrower. If the last borrower died or permanently vacated the home, the loan automatically became due and payable…. even if the surviving spouse was still living in the home. This is no longer the case.

The Solution [ML 2014-07]

FHA changed HECM guidelines in 2014 allowing certain “Qualified Non-Borrowing Spouses” to continue living in their home following the death of the last borrower. The “due and payable” status of the mortgage could be deferred if the spouse is “qualified”, meaning 1) they are married at the time of application and continue to be married over the life of the loan, and 2) the Non-Borrowing Spouse occupies the home and continues to occupy the home for the life of the loan.

This created another issue: Having an NBS generally meant the borrower would have access to less funds. This was because the borrower’s available funds became based on the youngest age, which was likely the non-borrowing spouse. This was true whether the NBS was qualified for the deferment or not.

The Clarification [ML 2015-02]

Some lenders argued that if an NBS is “NOT qualified”, they shouldn’t be required to use the age of the NBS in the calculation of the borrower’s principal limit. As a result, FHA issued Mortgagee Letter 2015-02 to create new designations – Ineligible and Eligible Non-Borrowing Spouses.

An INELIGIBLE Non-Borrowing Spouse:

• Generally does not occupy the home,
• Is not protected by the “due and payable” deferral provisions, and
• Does not have their age used in the calculation of the borrower’s principal limit

An ELIGIBLE Non-Borrowing Spouse:

• Occupies the home
• May be protected by the “due and payable” deferral provisions, and
• Has their age included in the calculation of the borrower’s principal limit

2021 Changes to NBS Guidelines

There were two significant changes in 2021 that improved protection for non-borrowing spouses.

The first eliminated the requirement for the NBS to “obtain ownership of the property or other legal right to remain in the property” within 90 days after the death of their spouse. This was a big hurdle for a grieving spouse. This now makes it easier to qualify for the due and payable deferral.

The second expanded the criteria that would qualify for the deferral period. Until this mortgagee letter, the borrowing spouse had to die for the spouse to qualify for the deferral. Now, the spouse may still qualify for the deferral if the borrower resides in a health care facility for more than 12 consecutive months.

Frequently Asked Questions

• Can a non-borrowing Spouse remain on title?

YES. HUD made additional regulatory changes in 2017 that redefined the terms “mortgagor” and “borrower.”  That change allowed an NBS to remain on title as a mortgagor. Keep in mind, this does not make them a borrower in any way.

• What are the obligations off the non-borrowing Spouse?

After the last borrower dies or permanently vacates the home for mental or physical illness, the NBS will need to make sure to keep up with all the obliga­tions of the HECM including the payment of property charges. While they may be able to remain in the home, they will need to ensure the loan does not become due and payable for other reasons.

• Can a non-borrowing Spouse draw from the line of credit?

NO.  the NBS is not a borrower or party to the loan in any way. No disbursements can be made during the deferral period other than repair charges paid through a repair set-aside. This means that the line-of-credit and monthly payments will cease, including a Life Expectancy Set-Aside (LESA) used to pay property charges.

• What are the exceptions to the rule?

These protections only apply to HECM loans with FHA Case numbers assigned on, or after, August 4, 2014. For loans originated prior to that date, the lender has the option, but not the obligation, to assign the loan to HUD. This assignment of the loan may provide similar protection for the NBS.

For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.

Dan Hultquist

The answer is maybe, but probably not for the reason you think. Rate caps restrict the movements of interest rates, and the conventional wisdom is that more restrictive caps are better for the borrower, right? Not necessarily.

Of course, we do not know what the future holds, but the easier question to answer is have they mattered in the past? While that depends on which Home Equity Conversion Mortgage (HECM) product was selected and when the loan was originated, I can answer the question.

Keep in mind the following items when discussing reverse mortgage rate caps:

• Monthly-adjusted HECMs do not have regulated cap structures. Historically, they have been offered with a Lifetime cap of 10% above the starting rate. Only in recent years have 5-cap monthly ARMs been offered.
• Annually-adjusted HECM ARMs do have regulated cap structures – the rate cannot move more than 2% (up or down) from year to year, and no more than 5% (up or down) from the starting rate.
• The LIBOR index was used from 2008 to 2020. However, for this analysis we’ll focus on the currently-used 1-year CMT index which dates back to the origins of the HECM program.
• The interest rate is the sum of the lender margin plus the appropriate index rate. Because the margin never changes and is not relevant to the analysis, we will only focus on the index portion.

Monthly HECM – 10% Lifetime Cap

Historically speaking, the monthly 10-cap HECM has never had interest rates restricted. We know this because the 1-year CMT has ranged between a low 0.06% and high 9.78% since the foundation of the HECM program in the late 1980s. Consequently, the interest rate has never moved more than 10% (up or down) during that time.

Monthly HECM – 5% Lifetime Cap

It doesn’t appear the monthly 5-cap HECM has been capped either. However, it should be noted that this cap option is relatively recent – offered on and off over the last 10 years when index rates have been low.

Annual – 2% Periodic and 5% Lifetime Caps

YES, this option has been capped in the past. Remember, annually adjusted HECM rates cannot go up OR down by more 2% from year to year or 5% over the life of the loan. Most of the restricted rates occurred on the lower bound (falling rates), not on the upper bound (rising rates).

For example:

Consider a borrower that obtained a HECM 20 years ago in January 2001.

• Starting date: 1/1/2001
• Starting index rate: 4.81%

The following chart demonstrates how the Annual HECM cap structure restricted the interest rate for this borrower over a 20-year period:

As you can see, this borrower’s interest rates would have been capped three times over the last 20 years; all three were a result of interest rates falling rapidly. Consequently, this borrower’s average index rate over the life of the loan is higher – calculated at 1.75%. A borrower with a monthly adjustable product would have benefited from an average index rate of 1.58% where their rates were free to drop freely.

While most borrowers think more restrictive caps protect them and always work to their advantage, this example proves that is not always the case. The monthly adjustable with 10% caps had lower index rates while the annual product with more restrictive (2%/5%) caps had higher rates because of the cap structure.

For more information on reverse mortgages, please subscribe to this blog and consider buying your copy of Understanding Reverse.

Dan

Rates are extremely low right now, and I’m not just talking about traditional fixed rate mortgages. When reverse mortgage rates drop, it’s highly beneficial to new reverse mortgage prospects as well as for existing borrowers with federally insured reverse mortgages called a Home Equity Conversion Mortgages (HECMs). As a result, I’ve been asked by many loan originators and consumers to explain how and when their variable rate HECM loans will adjust.

WHEN DO RATES CHANGE?

Monthly adjustable HECMs, as the name implies, adjust each month. The more popular annually adjustable HECM adjusts once every year. At closing, the lender will choose a specific annual adjustment day within HUD parameters. By convention, annual HECMs generally adjust on the 1^st day of the month following the anniversary of the closing date.

For example, if you closed on July 15, 2019, your rate change would be scheduled 12.5 months later – August 1, 2020. In this example, the first of August would be your designated rate change date every year.

AM I NOTIFIED OF THE CHANGE?

Yes. HUD requires the borrower to be notified of the specific rate and publication date 25 days before any rate change. Using the example above, the notification would be postmarked on, or before, July 7, 2020.

WHAT RATE IS USED?

For the annually adjusted HECM, that is generally the 1-year LIBOR index published in the Monday Wall Street Journal. When the LIBOR index is phased out at the end of 2021, a comparable index will be approved by HUD and used for future rate changes.

Contrary to popular opinion, we are NOT using the rate that is “PUBLISHED” 30 days prior (or 1 month prior) to the rate change date. Rather, we are using the rate that is “IN EFFECT” 30 days prior the rate change date.

Once again, using our example above, the servicer would use the rate in effect on July 2, 2020 for the August 1, 2020 rate change.

REAL WORLD EXAMPLE

Let’s look at published 1-year LIBOR rates at the end of June and beginning of July 2020:

• Friday 6/26/20             0.566% *           
• Wednesday 7/1/20      0.533%                (1 month prior to 8/1 rate change)
• Thursday 7/2/20          0.539%                (30 days prior to 8/1 rate change)

*Note: This rate is published on Monday 6/29 and is in effect Tuesday 6/30 through Monday 7/6

In this case, the rate that was in effect 30 days prior to August 1^st was the Friday June 26^th rate published on Monday June 29^th, even though that is more than 1 month before the rate change.

If this existing HECM loan has a 2% lender margin, the borrower’s interest rate will adjust to 2.566% on August 1^st and remain at that rate for 12 months.

I hope this clarifies a rather confusing reverse mortgage concept. For more information on how reverse mortgages function, please subscribe to this blog and consider purchasing a copy of Understanding Reverse.

I recently had the opportunity to present at our national conference alongside industry trainer, Jim McMinn. During this presentation, one talking point stood out as a misconception that needed addressed – what is necessary to satisfy a HECM loan when it matures?

The conventional wisdom is that a HECM payoff will be the lesser of the loan balance or 95% of the property’s appraised value. Unfortunately, this is only true under certain circumstances.

Consider an older borrower whose financial position has changed. Maybe it was a life insurance claim for a deceased spouse, inherited funds, or an investment that matured. Whatever the reason, if that borrower wishes to pay off a HECM loan balance, they owe the full loan balance.

There are cases, however, where borrowers or their heirs can satisfy the HECM for 95% of the appraised value. The availability of this option may depend on whether the loan is “due and payable,” who is doing the satisfying, and the definition of the word “sale.”

WITH A TRADITIONAL SALE OF THE PROPERTY

The borrower or their estate may sell the property at any time for the lesser of the following two values:

1. The debt due under the mortgage, or
2. The appraised value at the time of the sale. *

Therefore, one CANNOT arbitrarily sell the home for 95% of the appraised value and satisfy a HECM loan balance that exceeds this amount.

WHEN THE LOAN IS DUE AND PAYABLE

If the mortgage is due and payable at the time the contract for sale is executed, the threshold is reduced. This is generally the case when the last borrower has died. In this event, the borrower may sell the property for the lesser of the loan balance or 95% of the current appraised value. **

In essence, the “95% SALE” option becomes available when the HECM loan becomes due and payable.

IF THE HEIRS WANT TO KEEP THE PROPERTY

This can get tricky. The non-recourse feature offered with reverse mortgages requires a sale of the home. Fortunately, HUD interprets the word “sale” to include any post-death conveyance of the mortgage property to the borrower’s estate or heirs. ***

Therefore, if the heirs want to keep the home AND want a discounted payoff of the HECM loan balance, they will need to show a transfer of title that occurs upon the death of the last borrower, or after. This could be in the form of a trust, a life estate, or simply probating the homeowner’s will.

The danger is that heirs who are already on title at the time of the last borrower’s death may not qualify for the reduced payoff.

For more information on details related to reverse mortgage products, subscribe to this blog and consider buying a copy of Understanding Reverse.

Dan Hultquist

• *Reference – HUD 4330 Ch13-29A
• **Reference – HUD 4330 Ch13-29B
• ***Reference – FHA INFO #13-36

The short answer is yes. ANY homeowner or estate can lose a home for various reasons. While the media sensationalizes this as “news,” they haven’t taken the time to understand reverse. But as ridiculous as this sounds to the novice, there are ACCEPTABLE foreclosures from the borrowers’ (and the heirs’) point of view.

Consider Susan, who after the death of her father decided to “walk away” from the property she inherited. That’s okay. Susan is protected by the “non-recourse” feature that guarantees her right to do this… with no recourse, even if the loan balance far exceeds the value of the property. While this type of foreclosure is often vilified by the media, it was a very favorable financial transaction for Susan’s father, and a non-recourse foreclosure was acceptable to Susan.

When we think of foreclosure, we naturally think of the most common reason traditional (forward) loans end in foreclosure – failure to make the required monthly mortgage payment. Of course, that wouldn’t make sense with a reverse mortgage that carries no monthly repayment obligation. So, it’s understandable why homeowners, their heirs, and the media are often confused when they see that reverse mortgage foreclosures happen from time to time.

WHY WOULD A REVERSE FORECLOSURE OCCUR?

While reverse mortgages don’t require a monthly principal and interest mortgage payment during the life of the loan, there are other borrower obligations contained in the reverse mortgage loan agreement. The borrower has agreed to occupy and maintain the home, as well as pay all property-related charges. Failure to do these things will cause the loan to mature. When a loan maturity event happens, the borrower (or their heirs) will often sell the home to pay off the loan balance.

For example, when the last surviving borrower leaves the home for 12 consecutive months for mental or physical incapacity (e.g. nursing home or assisted living), that is a maturity event. The borrower or their heirs will often notify the lender of their intentions to sell the property. The lender will then allow them 6 months to sell the home and HUD generally approves two 3-month extensions for up to one year. 

If no action is taken to sell the home, the lender will need to foreclosure on the home, handling the sale themselves so that the loan can be repaid.

The following are two common reasons reverse foreclosures occur:

1. No equity remains at loan maturity

When the loan balance exceeds any reasonable sales price of the home, the estate has no economic incentive to sell the home on their own. Fortunately, all reverse mortgages are “non-recourse” loans. Nevertheless, foreclosure is the mechanism that conveys title to HUD (or the Lender) so the home can be sold to pay off at least a portion of the loan balance.

2. A property tax default occurs

Failure to pay property taxes will almost always result in foreclosure. This is true whether the homeowner has a reverse mortgage, a traditional mortgage, or no mortgage at all. However, the lender is the major lien-holder on the home and is required by federal guidelines to foreclose on the property for most reverse mortgages.

Keep in mind, a reverse mortgage naturally allows the homeowner access to funds, which should theoretically REDUCE the likelihood that a borrower will default on their obligations. But with the increased financial pressures of retirement, we cannot always guarantee that homeowners will keep funds in reserve.

PROPERTY CHARGE FORECLOSURES ARE DOWN DRAMATICALLY!

While nothing can be done to keep people from the grave, two measures were implemented by HUD over the last six years that have been helpful in reducing the numbers of foreclosures caused by tax defaults – Initial Disbursement Limits and Financial Assessment.

Initial disbursement limits were implemented that restrict the consumption of proceeds for the first year of the loan. Unless the borrower has large mortgage payoffs that necessitate higher draws, the borrower may be initially limited to 60% of their funds. As a result, borrowers now keep a portion of their proceeds in a growing line-of-credit available for future emergencies.

Financial Assessment requires the lender to examine the credit history, property charge history, and residual income for one primary reason – to determine whether the reverse mortgage is a sustainable solution for the borrower. To ensure sustainability, some borrowers are now required to set-aside a portion of the proceeds to pay property charges.

These two changes have reduced the number of reverse mortgages nationwide but has also reduced the number of foreclosures.

Yes. Foreclosures can happen, and they will continue to occur. Remember, Susan walked away because her father consumed more available funds during his retirement than the home was eventually worth. For more information on all forms of reverse mortgage product offerings, subscribe to this blog and consider buying the reverse mortgage resource consumers and finance professionals use – Understanding Reverse.

Dan Hultquist, MBA, CRMP

On Friday, December 14th, we saw The U.S. Department of Housing and Urban Development (HUD) raise the 2019 limits for FHA’s reverse mortgage product – the Home Equity Conversion Mortgage (HECM). This means that homes valued above $726,525 are capped at that figure when calculating principal limits.

This is an increase of nearly $47,000 from 2018 and comes at a time when more non-government “proprietary” jumbo reverse mortgage products are making the opposite move – appeal to more lower value homes.

The end result is that more consumers are finding more options for accessing their housing wealth as part of a comprehensive retirement plan. Because of this shift, I have updated my book for 2019 to include the new HECM lending limits as well as a new chapter titled, “What are Proprietary Reverse Mortgages.” The following is a preview of the new chapter:

The federally insured HECM has been the dominant reverse mortgage product for the last three decades. That’s changing, however, as innovative mortgage lenders have found that certain restrictive HECM guidelines have opened the door for non-agency reverse mortgage products.

These “proprietary” reverse mortgage options still maintain many of the consumer protections of the HECM program. Reverse mortgages, FHA-insured or not, must be non-recourse loans. But, of course, these proprietary products do not charge the initial MIP (2%) or annual MIP (0.5%). So, while the rates may be slightly higher, you might find the up-front charges to be significantly reduced.

NOT JUST A JUMBO OPTION ANYMORE

For the last few years, the phrase “jumbo reverse mortgage” was used to describe these options, as lenders were able to better serve borrowers who owned higher-priced homes.

However, these new products solve other problems that HECMs currently do not. Here are a few:

• HECMs require condominium complexes to be FHA approved before units can be eligible for HECM financing. Proprietary products may finance units within non-approved condo projects.
• HECMs have initial disbursement limits that often prevent borrowers from accessing more than 60% of their principal limit within the first year. Proprietary products have no such restrictions.
• HECMs require all existing liens to be paid off a closing. One proprietary product now allows the reverse mortgage to be in second lien position.
• HECMs do not currently allow the payoff of unsecured debt at closing. Proprietary products may allow the payoff of personal debt and other items at closing.
• HECMs require most liens to be seasoned for 12 months before closing. Proprietary products often have no seasoning requirement.
• HECMs require all borrowers to be age 62 or older. One proprietary product offers financing for borrowers as young as age 60.

Some are offered as first liens. Some are structured with a growing line of credit that mimics the HECM ARM. Still, others allow the loan to remain in a second-lien position in cases where the first mortgage has an attractive low rate.

For more information on all forms of reverse mortgage product offerings, subscribe to this blog and consider buying the reverse mortgage resource consumers and finance professionals use – Understanding Reverse.

Reverse Mortgage Professionals find themselves constantly touting, defending, and pitching the numerous advantages of the federally insured Home Equity Conversion Mortgage (HECM). The primary reason they put in so much effort is not to make a sale. It is because the public is still confused and largely unaware of the lifestyle and financial planning advantages of the product. After 30 years, many older homeowners still think they lose title and ownership of their homes with this financial tool.

However, most eligible candidates are ALSO unaware of the many reasons NOT to get one. The fact is, there are individuals for whom this is not a good fit. It would be best to identify them upfront before they spend the time, energy, and money it required to complete the mandatory HECM counseling. So, let’s highlight a few conditions that could mean that a reverse mortgage might not be a good option:

1. If the home does not fit the homeowner’s long-term needs

If the homeowner has the intention of selling the home within the short-term, or if the home does not meet their long-term physical needs, a reverse mortgage may not be a good fit. While they can certainly sell the home at any time, the program was designed to meet the needs of older Americans who wish to age in place. If you want to stay, and are physically able to stay, you have passed my first test.

2. If the Reverse Mortgage does not provide a tangible benefit

It not only has to make sense right now, but also needs to provide a sustainable solution throughout retirement. If the reverse mortgage offers little current or future advantage to a borrower, then the homeowner should look for other options.

And using a reverse mortgage to eliminate monthly mortgage payments does not always guarantee that a homeowner will have positive monthly cash flow. New regulations, however, were implemented to ensure that monthly residual income is considered in underwriting the loan.

3. If the homeowner does not adequately understand the product

A HECM borrower or their trusted advisor must be comfortable paying property charges, maintaining the home, and managing finances. Unfortunately, many are not accustomed to handling these items. In addition, some may have competency issues that prevent them from fully understanding the complex loan product for which they are applying. Consequently, HECM Counseling is required to make sure all parties understand not only the product, but also other options that may be available to them.

4. If the homeowner wishes to protect a legacy

I reluctantly include this item on the list. Many experts don’t consider inheritance a reason NOT to get a reverse mortgage. This is because homeowners who obtain a growing HECM line-of-credit early in retirement are better equipped to decide how future expenses are paid – by the homeowner, by the heirs, or by the home.

Some homeowners, however, wish to protect their home’s equity as a legacy for their heirs and would never consider accessing home equity in an emergency. That’s a very nice gesture, and I can understand wanting to leave this world giving an inheritance to those you love. The debate becomes whether an inheritance is a right of the heirs or a gift from the parents. That will be a blog for another day.

If the homeowner wants to stay in the home, and understands the advantages for themselves and their heirs, come explore the strategic uses of home equity in retirement. For more information, subscribe to this blog and purchase the book, Understanding Reverse.

Dan Hultquist

HECM for Purchase began with the passage of the Housing and Economic Recovery Act of 2008. Prior to this legislation, if a homeowner in retirement wanted to relocate, qualifying for the new home often proved difficult. They would have to be eligible to purchase a home though traditional means, establish their residency in the home, and then refinance with a HECM if desired.    – Understanding Reverse

Some baby boomers continue to reside in homes that are no longer ideal. Unfortunately, they are unaware of a home financing option that was built specifically for them – The Home Equity Conversion Mortgage for Purchase, or HECM for Purchase.

Older homeowners often find themselves wanting (or needing) to RELOCATE to be closer to family members, DOWNSIZE to a more manageable home, or even UPSIZE to a retirement dream home on the beach, golf course, or active adult community.

I often receive phone calls that highlight the need for this program, such as:

• “My grandmother wants to move south to be closer to her kids and grandkids.”
• “With my knee and hip problems, I need a single-story home, preferably one that requires little maintenance.”
• “I want to live near my friends in a 55 and over community on a golf course.”

When physical limitations become a reality, or when individuals desire a closer connection to family, a move may become necessary. The reverse mortgage can help them move AND keep more money in their pockets.

But how does it work?

With a traditional reverse mortgage, the lender offers a homeowner a percentage of the home’s value that can be used whenever needed. With a HECM for Purchase, however, those reverse mortgage funds are generally applied to a new home’s sales price. Depending on the age of the youngest participant, the lender is generally able to contribute 40% to 75% of the purchase price.

As always, no monthly principal and interest payments are required, and the homeowner gets to retain title and ownership of the home.

Why use this product?

Most HECM for Purchase candidates are selling their current homes and relocating. These homebuyers often believe the only way to relocate AND not have a monthly payment is to purchase the home in cash – the senior nets $200,000 on the sale of their existing home and is shown homes in that price range. They are unaware that a $400,000 home – purchased with a reverse – would have the same monthly principal and interest payment – $0.

In addition, if they use the HECM for Purchase to finance a large portion of the sales price, the homeowners can retain more cash reserves. This is a great opportunity to supplement retirement savings.

What’s in the fine print?

Reverse Mortgages are offered for “PRINCIPAL” residences only. This means that the homeowner must occupy the home, and the HECM for Purchase cannot be used for 2^nd homes or investment properties. In fact, the borrower must occupy the home within 60 days of closing.

Because this loan product is federally insured, the HECM for Purchase will always require upfront, and ongoing, Mortgage Insurance Premiums (MIP).

Lastly, please be aware that sometimes mistakes are made when a Realtor writes a sales contract for a HECM. HUD still restricts many forms of seller-paid closing costs for HECMs. So it’s important that the Realtor works with an experienced reverse mortgage professional who can guide everyone through the process.

If you want to know the facts about reverse mortgages, please consider purchasing my book, Understanding Reverse.

Dan Hultquist, CRMP, MBA

You see it all the time – articles about reverse mortgages that begin with “They are not for everyone”, and then the author describes an ideal scenario. Sadly, many perfect candidates won’t consider a reverse mortgage because misinformed authors and consumer advocates have painted the wrong picture of the product.

Some phrases that are inaccurately used to describe the model applicant include:

• Older homeowner
• Cash-strapped or desperate
• Last resort
• House rich – cash poor

These are descriptions of traditional “needs-based” reverse mortgage borrowers. However, with the regulatory reforms of the last four years, these borrowers are now a smaller portion of the three primary uses described in my book.Of course, with any reverse mortgage applicant, we want to make sure it is their intention to remain in their home – preferably through retirement. But it may surprise you that the following may be qualities of an ideal reverse mortgage candidate today:

• Age 62
• Still working
• Has about 5 years to pay on their forward mortgage
• May never need to access the funds

Let’s look at each characteristic and why the product may be advantageous to them:

Age 62

62 is the earliest age a homeowner can obtain a reverse mortgage. Obtaining one early maximizes the line-of-credit (LOC) growth potential of the product. Telling someone to wait to get a reverse mortgage is like telling a 35-year-old to postpone saving for retirement. This is because the available funds in the guaranteed line-of-credit will experience compounded growth. These funds are expected to grow at approximately 6.25% annually, but compound monthly. At that rate, a $200,000 line of credit would grow to nearly $700,000 in 20 years, regardless of the home’s value. This LOC grows tax free, and may be drawn tax free, which unlocks many strategic options at age 82.

Still working

Many will claim the greatest advantage of a reverse mortgage is that “there are no required monthly principal or interest payments.” I would counter with, “for those that are still working, the ability to make optional payments is a greater advantage.” For those that can make payments, a reverse mortgage loan balance will drop in a similar way as a forward mortgage. However, each payment also boosts the LOC for future use.

Many pre-retirees are faced with a decision – should I accelerate payments on my forward mortgage to reduce my loan balance before retirement OR should I save additional funds for retirement cash flow. Making payments with a reverse mortgage accomplishes both objectives at the same time.

Has about 5 years to pay on their forward mortgage

Those that only have a handful of years to pay on their traditional mortgage or Home Equity Line of Credit (HELOC) naturally have low payoff amounts. If the lender can payoff those balances and closing costs, and use 60% or less of the borrower’s initial benefit amount, the initial insurance premium drops from 2.5% (generally of the property value) to 0.5%. This is an extremely low initial fee for any government-insured loan product.

For those that are carrying a moderate loan balance on their reverse mortgage, the interest rates are still expected to be relatively low for the next few years. Ideally, the borrower would make payments during the first few years to reduce the loan balance. After that, the homeowner will benefit from higher interest rates, as the available LOC will grow faster.

May never need to access the funds

The LOC works very well as an emergency fund, a “stand-by”, or even an insurance policy. There are initial costs. But the on-going costs of the loan are based on the funds that are borrowed. In other words, if the borrower never needs the funds, the carrying costs of the growing LOC may be very low.

Imagine having a loan balance of $1,000, and a LOC of $200,000. The loan balance is expected to grow only $65 in the first year. However, the homeowner can raise their deductibles on every insurance policy they hold. They can now self-insure. This reduces expenses and raises monthly cash flow. In addition, the homeowner can draw less in taxable monthly retirement income.

Of course, this is only a partial list. We haven’t begun to discuss the many financial planning implications. For example, those who do not qualify for, or cannot afford, long-term care insurance are great candidates as the home can fund future in-home care. Those that wish to relocate, upsize, or downsize, can keep more of the gains they receive from the sale of their existing home by using a HECM for Purchase.

Years ago, I wrote that when I turn 62, I WANT a reverse mortgage. Do I plan to be a cash-strapped, house rich – cash poor, desperate older homeowner? Of course not. The financial planning advantages are too strong to ignore when the benefits are properly understood.

For more information on strategic uses of the reverse mortgage product, please purchase Understanding Reverse – 2017 and subscribe to this blog.

Dan Hultquist

Many financial planners are now recommending reverse mortgages, as they have finally begun to recognize the strategic uses of home equity as a retirement planning tool. Sadly, however, many will consider the product only once their other retirement funds are depleted. This “last resort” tactic has shown to be less than optimal in academic studies by Barry Sacks, Wade Pfau, John Salter, and others. When you begin to understand the dynamics of the federally-insured Home Equity Conversion Mortgage (HECM), you’ll find that waiting often doesn’t make sense.

WAITING SIMPLY DOESN’T PAY

In 2015, I wrote a piece titled Waiting Simply Doesn’t Pay. In the blog, I made the following statement:

“If you only have a basic understanding of Reverse Mortgages, then waiting appears to be the right advice. After all, older borrowers get more money, right? If I wait 5 more years, not only will I be older, but my home will be worth more, and I will have paid down my forward mortgage. These may seem like logical reasons to wait… to the novice.”

I went on to explain the following three reasons why it doesn’t pay to wait:

1. Reverse Mortgage proceeds are based on interest rates. When rates go up, new applicants may have access to much less of their home equity.
2. Waiting sacrifices compounding line-of-credit (LOC) growth. The LOC growth is maximized by obtaining the reverse mortgage early and letting time do its work.
3. There is no guarantee one will qualify in the future. Financial Assessment has made it harder to obtain a reverse mortgage at a time when you are more likely to need it.

What I didn’t explain in my previous blog is that the costs and benefits of waiting are easily quantifiable.

WHAT IS THE INCREMENTAL BENEFIT OF WAITING ONE YEAR?

Even if the HECM program remains unchanged, and expected rates stay low (rounding to 5.0% or lower) in the future, the incremental benefit of the client being one year older, averages less than 1% more in principal.

Consider a 67-year-old homeowner who wishes to wait another year when he or she is 68 years old. As you can see below, waiting one year would yield an increase in the homeowner’s calculated Principal Limit Factor (PLF) of 0.6%.Principal Limit Factors are tables, created by HUD, that determine how much a lender can offer a homeowner at the time the loan closes. In this example, a 67-year-old homeowner with a $200,000 home might have access to $111,200 at the time of closing. All other factors being equal, waiting one year yields this homeowner an increase of 0.6% or $1,200 more in principal.

If the home appreciates by 4% during this time, the homeowner would have access to 56.2% of that appreciation by waiting. Another way to express this is that a “home gain” would be another 2.2% (56.2% of the 4% increase).

This net gain of 2.8% is nice, but small when compared to the expected growth in the homeowner’s principal limit if they obtained the HECM at age 67 instead. This is because Principal Limits (for existing clients with adjustable rate HECMs) rise each year by the current interest rate plus 1.25%.

At the time of this publication, a lender margin of 2.75% plus the 1-yr Libor index shows an initial interest rate of 4.522%. When 1.25% is added, the Principal Limit growth for the same borrower during that year would be estimated at 5.772% or $6,418.

Clearly, the PLF increase is small when delayed, and the borrower has lost some of the compounding potential of the product.

WHAT IF INTEREST RATES GO UP?

To determine a homeowner’s initial Principal Limit, we use “Expected Rates”, which is the market’s best estimate of future rates. As long as expected rates round to 5% or less, the borrower will receive the maximum principal limits for their age. In the example above, we established that a borrower at age 67 today can qualify for 55.6% of a home value of $200,000.

However, if long-term rates rise to 6% while waiting, this could yield the homeowner much less in principal.

A 1% increase in expected rates would probably drive the lender margins lower to stay closer to 5%. Otherwise, waiting one year could decrease principal limits from 55.6% to 43.6%. That is a reduction of 12% or –$13,344 in this example.

Incidentally, if the HECM had been secured, any future interest rate increase could be beneficial, if that homeowner holds most of his/her funds in the growing LOC.

While we don’t want to create an unmerited sense of urgency, clients need to be aware that research shows that waiting for a reverse mortgage generally isn’t optimal. NOW may be the best time to obtain one.

For more information on the strategic uses for Reverse Mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

Dan Hultquist

For most of us, the bulk of our housing costs are relatively constant. Monthly mortgage payments may vary slightly as property taxes and insurance rate are updated annually. But one housing cost is often seasonal – Heating Ventilation and Air Conditioning (HVAC). It can make, or break, a budget.

One advantage of living in the south is the reduced cost of heating a home during the winter. The trade-off is the high cost of energy to cool the home in the summer. But this year, the U.S. Energy Department has forecast a significant increase in heating costs for the four primary fuels that heat America’s homes – natural gas, heating oil, electricity, and propane.

Some of these increases are due to price increases. However, according to the U.S. Energy Information Administration (EIA), weather plays a role as well.

“The latest outlook from NOAA expects winter temperatures east of the Rocky Mountains to be colder than last winter, with projected heating degree days in the Northeast, Midwest, and South about 16-18% higher.” www.EIA.gov

Colder Weather May Fuel Reverse Mortgage Demand

Here are the EIA’s projected cost increases per household this winter by fuel type:

• Natural gas         + $116   (+ 22.4%) representing nearly 1/2 of U.S. households       
• Heating oil          + $378   (+ 38.1%)            
• Electricity            + $49     (+ 5.4%)
• Propane (NE)      + $345   (+ 21.0%) in the Northeast
• Propane (MW)    + $290   (+ 29.6%) in the Midwest

We never know what contingencies may arise that will disrupt the monthly budget. Things like inflation, low interest rates, a poor sequence of market returns, family emergencies, and health concerns can all impact a homeowner’s bottom line. For those on a fixed income, these increases in winter heating costs are significant.

Fortunately, most older homeowners have a home equity nest egg that can improve their retirement cash flow. The reverse mortgage line-of-credit (LOC) may be established early in retirement and used for unexpected expenses or emergencies. If monthly cash flow is needed, a reverse mortgage tenure or term payment may do the trick.

If you have read my previous blogs and/or my book, Understanding Reverse, you might remember that I discussed three primary uses for reverse mortgages – Need, Lifestyle, and Planning.

Using a reverse mortgage to supplement retirement cash flow may allow the home itself to pay for increased heating costs. This can be done without disrupting traditional retirement planning. For this reason, a reverse mortgage may be used for all three of the primary uses mentioned above. Keeping the home at a comfortable temperature satisfies a need, improves lifestyle, and protects traditional retirement planning.

While the overwhelming majority of baby boomers wish to remain in their existing homes during retirement, homeownership can be expensive. I should know. I’m scheduled to replace two air conditioning units in the spring. But it may be wise for those who are at least age 62, and wish to age in place, to consider establishing a reverse mortgage line-of-credit today, and know that they can weather the winter storms as they come.

Others are warming up to the idea of using a reverse mortgage to enhance retirement. To learn more this financial tool, buy the book, Understanding Reverse, and subscribe to this blog.

As this is the last blog post of 2016, I want to thank those of you that have made Understanding Reverse the top-selling book on Home Equity Conversion over the last two years. Stay tuned for the release of the 2017 edition, and have a Merry Christmas and a Happy New Year.

Dan Hultquist