Since 2013, the federally-insured reverse mortgage program has gone through so many dramatic changes that it’s no longer the reverse mortgage everyone thought it was. Some of the changes added consumer protections, while others radically altered the way reverse mortgages are obtained.

Unfortunately, many perfect candidates will continue to believe that the reverse mortgage is ONLY for the desperate homeowner with plenty of equity and no cash. I don’t fault them for this – the most common reverse mortgage, the Home Equity Conversion Mortgage (HECM), has been marketed that way. However, recent modifications by the Federal Housing Administration (FHA) have highlighted the financial planning advantages for the affluent. So, let me describe the three categories of homeowners who now come to me for reverse mortgages.

1. Reverse Mortgage for immediate NEED

Generally, these traditional HECM borrowers are house rich and cash poor. And they need money now. In many cases, we can help them. A good example might be a homeowner who needs in-home care. Monthly payments generated by home equity conversion can help when they, or their heirs, are unable or unwilling to pay for these expenses.

Many people assume that the need for money is the ONLY reason to get a reverse mortgage. Yet, this traditional type of homeowner is a smaller piece of the pie now.

2. Reverse Mortgage to enhance LIFESTYLE

Because reverse mortgages do not require monthly principal and interest mortgage payments, obtaining one can help with cash flow. Yet, there are many other lifestyle advantages. Tenure payments are a form of monthly draw. Tenure means permanent, and these monthly payments will continue as long as the homeowner occupies the home. This is a great way to improve the quality of life of someone on a fixed income.

Others enhance their lifestyles by accessing home equity to pay for home upgrades, travel, or new vehicles.

3. Reverse Mortgage as part of a comprehensive financial PLAN

Financial planners are now recommending reverse mortgages for clients who do not have an immediate need for them. Why? In part, because many homeowners have disproportionate amounts of their retirement savings held in real estate. Drawing part of their monthly income (tax-free) from their home equity nest eggs will help their traditional retirement funds last much longer.

The primary financial planning advantage, however, is the line-of-credit (LOC). This option allows homeowners to have an emergency fund that grows (again tax-free) at current interest rates. The funds are easily converted to monthly income later in retirement. Because the LOC experiences compounding growth, many homeowners will opt-in as early as possible, and draw their increased funds at a later date as a form of tax-free retirement income.

The HECM is still used by homeowners in need. However, research in the Journal of Financial Planning advocates that homeowners, age 62 or older, use this same program as part of a comprehensive retirement plan. Take a closer look. It’s likely not the reverse mortgage you thought you knew.

Dan Hultquist

Most successful blogs are infused with a little humor. Parenting blogs are funny. Kids say the darndest things. Other blogs are designed to enrage you. Sometimes I don’t know if I should laugh or cry at the political ones. However, other blogs are designed to educate, inform, and explain. Mine would fall into that category. If you read my book, or read my blog on a weekly basis, you know that any sense of humor I might possess is lost in my writing.

Those who have heard me speak will know that I will occasionally try to add humor to my presentations. There was one (a broker, a borrower, and a compliance officer walk into a bar) that was pretty funny to those in my field.  And then another (a borrower and a loan officer met with a palm reader to determine product suitability) that got a few laughs.

I’ve learned, however, that home equity conversion is really not that funny. Here are a few reasons why:

What we do is misunderstood

My daughter has a great sense of humor and likes to mimic me in a deep voice, saying “I give you money, you give me house.” Of course she knows better, and just to be clear, I give people a LOT of money, and they get to KEEP title to their home. It is a common misconception, however, that somehow the bank gets the home now, or when the homeowners die. This is not the case, and of course, it’s no laughing matter.

What we do is somewhat complicated

After having spent several years counseling, originating, and training, I spent much of 2014 reviewing the Code of Federal Regulations, multiple HUD handbooks, and every FHA letter. This was done not only to make sure I understand one of the most highly-regulated financial tools well enough to write a book called “Understanding Reverse,” but also to better assist loan officers and older homeowners with a better understanding of the product. Once again, no chuckles.

What we do is serious

Some older homeowners are faced with losing their homes. This can be tragic, and as a counselor I’ve cried with many of them. I have been able to prevent this by using reverse mortgages to pay off delinquent forward mortgages, tax liens, delinquent property taxes, and judgments that affect title to their homes. I recently closed a loan that paid all four of these items in time to avert a pending foreclosure. Because of negotiated payoffs, the homeowner now has an additional $100k in equity and no monthly payment. Without it, they would have lost their home. That’s serious.

To reverse mortgage professionals, the premise of a broker and a borrower walking into a bar with a compliance officer is funny enough without a punchline, and has probably never happened before. For those of you who want to know about the palm reader? She saw a love line, a long life line, and a large line of credit in the borrower’s future. However, she informed the loan officer, with outstretched palms, that because of federal regulations she was also required to look at the ARMs.

See… Not that funny 🙂

Dan Hultquist

Building a personal collection of rare items can be quite entertaining. Some of the most commonly collected items are pocket knives, comic books, sports cards, and postage stamps. While I have a small, but growing collection of coins, I may have the most obscure collection of all – reverse mortgage questions.

I do collect them, and occasionally I receive questions that are not addressed in my book, Understanding Reverse, because I would not consider them to be “top questions” material. The following is a recent addition to my collection that is important to know during tax season:

Why would a borrower get an IRS Form 1098 on a Reverse Mortgage? Does this mean they owe taxes?

This does create some confusion for reverse mortgage borrowers every January, and it needs to be addressed. Most reverse mortgage borrowers, however, won’t get a 1098 simply because most of them don’t make payments. Some will. In fact, we described some advantages in a previous post – Wait, Make Payments?

While I am not a tax professional, I can state that IRS Form 1098 is a form that lists items that were paid by the borrower. This is for tax and accounting purposes, and does not increase their tax liability. The Form 1098 is used to report potential deductions, and therefore may REDUCE their tax liability. For our purposes though, it means that the borrower made prepayments during the previous year that were applied to either their accrued mortgage insurance or their accrued mortgage interest.

The IRS deduction for Mortgage INSURANCE (itemized on line 4) was renewed by congress for tax year 2014. However, this deduction is very limited (see IRS Publication 936 [2014]). Therefore, the borrower may not be able to write-off that amount. Mortgage INTEREST (itemized on line 1), however, is more likely to be deducted. Of course it will depend on other factors that you should discuss with your tax professional. Nevertheless, the loan servicer is required to notify the borrower with a 1098 when payments exceed $600.

So, in summary, a reverse mortgage borrower may get a 1098 in January after making prepayments in the previous year and should consult their tax preparer. The borrower may, or may not, have a deductible item on the form, but it does not indicate the need to pay more taxes.

I have been collecting reverse mortgage questions for several years, and I’m aware that many in my collection hold limited value. Nevertheless, the answers to the most common questions asked about reverse mortgages were the basis for writing the book, Understanding Reverse, which has been helpful to many industry professionals and older homeowners.

If you would like to add to my collection, and possibly have your question anonymously addressed in my blog, please don’t hesitate to click the “CONTACT US” tab in the upper right corner.

Dan Hultquist

“The mortgagee must evaluate the mortgagor’s willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

– Mortgagee Letter 2014-21

If you have not already heard, the federally insured reverse mortgage program is going through another major change effective March 2, 2015 called Financial Assessment. For the first time, reverse mortgage lenders will be required to assess each borrower’s credit history and monthly residual income. This is a dramatic change for an industry where the focus has been primarily on the value of the home.

Why Financial Assessment?

The first question many will ask is, “why do these things matter when originating a loan that doesn’t require monthly repayment obligations?” After all, the value of the home and the age of the borrower are the primary factors in qualifying. So, why are residual income and credit now included in the underwriting of these loans?

The answer is that these loans should not be viewed as an emergency, short-term access-to-cash, program. Home equity conversion should accomplish more than that. It should always leave the borrower with the ability to pay their property charges and monthly bills. Therefore, we need to document that ability with this assessment. The reverse mortgage MUST be a sustainable solution for the homeowner.

According to Mortgagee Letter 2014-21, “The mortgagee (that is us, the lender) must evaluate the mortgagor’s (that is the borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

The critical borrower obligations and mortgage requirements are as follows:

• Upkeep of the home in good condition
• Payment of property taxes
• Payment of homeowners insurance
• Payment of other property charges (flood insurance, HOA dues, condo dues, etc.)

These are FHA requirements, and we need to document every borrower’s ability to meet these obligations. It is important to note, however, that Financial Assessment is NOT necessarily a “yes or no” qualification of the borrower. The results of Financial Assessment are generally used to determine whether a life expectancy set-aside is needed or not.

What is a Life Expectancy Set-Aside (LESA)?

When the underwriter determines that one or more of the financial assessment tests have failed, a Life Expectancy Set-Aside (or LESA) will be required. These are funds that are removed from the borrower’s principal limit and set-aside for the purpose of paying property charges over a calculated time period. The two types of LESAs that may be required are described here:

FULLY-FUNDED LESA – The lender uses funds set-aside from the borrower’s principal limit to pay three critical property charges; property taxes, homeowners insurance, and flood insurance (if needed). The lender pays these charges directly when the bills are due, in the same way a traditional escrow account functions.

PARTIALLY-FUNDED LESA – The lender uses funds set-aside from the borrower’s principal limit to supplement the borrower’s income. This is done to fund a homeowner’s gap in residual income. The lender releases necessary funds to the borrower semi-annually. The borrower, however, will be responsible to pay their own property charges.

For more information on consumer protections and other changes designed to strengthen Home Equity Conversion Mortgages, make sure you purchase the book, Understanding Reverse, and subscribe to my blog in the right-hand margin.

Dan Hultquist

“Being able to recognize the alternate uses of home equity in retirement requires one to take a long-term financial-planning view. Remember, the program was not initially designed as a short-term, quick fix. It was designed for two purposes – a monthly stream of income or a line of credit for future use.”     

– Understanding Reverse

What an odd question to ask. I believe in miracles, but I don’t necessarily believe in karma. I believe in an NCAA football playoff system, but I don’t believe the NCAA acts in the best interest of student athletes. I believe Roger Federer is the greatest tennis player of all time. But asking if I believe in Reverse Mortgages is like asking an English teacher if he/she believes in grammar. They both exist, but they are not properly understood by most people, and therefore misused.

This question, however, has been posed to me many times recently.  I generally don’t mind, because it offers me the opportunity to respond. I wrote the book Understanding Reverse to help educate people and to change perceptions. But I find that the question behind the question is often, “Do you believe Reverse Mortgages are good financial tools?” And the questioner has already formed an opinion.

The best way to respond is to ask what they currently know about Reverse Mortgages. That way I can assess their knowledge. I also find that most people can be classified into three different perspectives: the “Misinformed”, the “Last Resorters”, or the “Strategists”. Let me describe each:

Level #1: The “Misinformed”

A friend recently posted on social media, “Only a fool would get a Reverse Mortgage. It’s a scam.” That is terribly offensive to Reverse Mortgage Professionals commit themselves to act in the best interest of older homeowners. These comments, however, also reflect a level-1 understanding of the product. Their perception, or misperception, is generally skewed by the following THREE COMMON MISCONCEPTIONS:

• The bank gets the home now, or when I die
• I may end up owing more than the value of my home
• My estate will get stuck with a bill for loan balance deficiencies

Of course, we know that the homeowner holds title to the home for the life of the loan, and that the heirs generally have at least four options when the loan matures. In addition, the non-recourse feature states that the homeowner and their heirs will not owe more than the value of the home. They are not stuck with a bill. The FHA insures Reverse Mortgages and offers many generous consumer protections.

Level #2: The “Last Resorters”

A friend of mine was happy to report to me that their financial planner was open to Reverse Mortgages. The planner conceded that “there are times when a Reverse Mortgage may be an appropriate solution.” According to him, the ideal candidate is a homeowner who is house rich, cash poor, with no heirs, and is using it as a “last resort” to stay in their home. My response was “Congratulations. You have a financial planner who is willing to allow a desperate homeowner access to their own money”. That is a very short-sighted view of Home Equity Conversion, and unfortunately, that financial planner is missing the most critical financial planning aspects of the program.

Unfortunately “Last Resorters” have a limited understanding of the product and are influenced by the following THREE ERRONEOUS ASSUMPTIONS:

• Reverse Mortgages are very expensive
• Interest rates are very high
• Reverse Mortgages inherently cause home equity to decrease

Of course we know that the product can be very INEXPENSIVE for homeowners who stay in their homes for longer periods. Interest rates have been extremely LOW on Reverse Mortgages for quite some time. Finally, since initial disbursement limits were implemented, the majority of amortization schedules that I view show the homeowner’s equity INCREASING for many years. This is because interest accrual is projected to be small compared to home value appreciation.

Level #3: The “Strategists”

Individuals with a level-3 understanding of Reverse Mortgages are rare, but are becoming more common with the help of financial planning researchers and their published papers in the Journal of Financial Planning.

“Strategists” believe that the strategic use of home equity in retirement should be considered by all older homeowners as a form of insurance and/or retirement planning. They believe it strongly enough that they obtain Reverse Mortgages for themselves, and recommend them for their friends and their family members as early as they can.

Those with this higher-level understanding of Reverse Mortgages are influenced by the following SIX RELATIVELY UNKNOWN TRUTHS:

• The compounding line-of-credit growth is a powerful retirement planning tool
• Rising interest rates offer future advantages for homeowners using the product wisely
• Making payments toward Reverse Mortgage balances may have positive financial planning implications
• Reverse Mortgages can be used to delay Social Security, thereby increasing your monthly retirement benefit
• Reverse Mortgages can act as a hedge against property value declines
• The “Standby Reverse Mortgage” can extend a retirees assets, making them less likely to run out of money

Yes. I do believe the proper use of Reverse Mortgages should be considered as a part of every older homeowner’s retirement plan. To better understand the strategic uses for reverse mortgages, please subscribe to my blog in the right hand margin.

Dan Hultquist

“Historically, the principal limit has been a measure of what HUD says a borrower with certain factors is able to borrow at closing. After the September 2013 changes to the program, however, that definition is not quite accurate. Homeowners may be restricted in the amounts they can borrow up-front. Fortunately, with the adjustable rate products, the remaining net principal limit will be accessible after that first year.”

Understanding Reverse

One of the most common questions I get from borrowers is “What is the most I can borrow?” While borrowing it all up-front may not be the optimal strategy, it is important to know the amount of funds homeowners have available to them. It is also significant to note that this number increases with time. Therefore, technically what they really want to know is, “What is my initial principal limit?”

Initial principal limits vary from homeowner to homeowner and are based on AGE, RATES, and the HOME’S VALUE. Reverse Mortgage calculators will generate principal limits that are consistent from lender to lender. But let’s discuss how they are determined:

1. Begin with the Relevant AGE

Older borrowers generally qualify for higher principal limits. While all borrowers must be 62 or older, non-borrowing spouses may be much younger. Therefore, HUD publishes tables that reference every age from 18 to 99. Keep in mind the relevant age will be the youngest borrower, co-borrower, or non-borrowing spouse. I often refer to this as the “Age of Youngest Participant.”

2. Identify the Relevant RATE

For fixed-rate reverse mortgages, we will use the interest rate. With adjustable rate loans, however, FHA requires us to project what the rate for a particular reverse mortgage may be in the future. This number has been between 4% and 6% for quite some time, and is referred to as the “Expected Interest Rate.”

Using these two items (age and rate), we can look up the homeowner’s Principal Limit Factor (PLF) from HUD’s factor table.

In the chart below, you will see a small sample of selected ages and selected expected rates and the corresponding PLF% from the 2014 table.

3. Multiply the Homeowner’s PLF by the Home’s Value

When the PLF is multiplied by the home value we get the initial principal limit in dollars. Bear in mind that higher home values will be capped at $625,500 (for calendar year 2015) for the purpose of this calculation.

Let’s look at an example.  Linda is 74 years old, and she is younger than her spouse. Therefore, she is the youngest participant. She has an expected rate of 5.00%. Using these two pieces of information, we can look up a PLF of 60.6%.

60.6% of Linda’s home value of $200,000 will give her an initial principal limit of $121,200. This principal limit will increase for Linda every month that she remains in the home, regardless of future home values. She could borrow it if needed, or let it continue to grow. Eventually, her available funds my even grow to exceed the value of her home.

For those homeowners that use the product for financial planning purposes, this increasing principal limit can offer a secure collection of funds to be accessed later in retirement if needed. The compounding is working in the homeowner’s favor, and is a good reason to consider getting a reverse mortgage early in retirement.

To learn more about reverse mortgage guidelines and the advantages they offer older homeowners who use them properly, please purchase a copy of my book, Understanding Reverse.

“Whether households have sufficient savings from which to ensure adequate income throughout retirement is a concern of households and, therefore, policymakers. Although most households are eligible to receive Social Security benefits in retirement, over the past 30 years, the types of non-Social Security sources of retirement income have been changing.”        – John J. Topoleski, Analyst in Income Security, Congressional Research Service – July 23, 2013

Retirees are worried about it. Children of retirees are worried about it. Financial Planners are worried about it. Heck, CONGRESS is worried about it! Will we have income during our retirement to last through unexpected circumstances and increased longevity?

It might help to know what options are available. Most people are familiar these five traditional methods of providing for monthly expenses during retirement:

• Social Security Income (and sometimes Supplemental Security Income)
• Pension Income
• Retirement Savings Plans
• Medicare (and sometimes Medicaid)
• Part-time Employment

Each these five methods, however, have issues that explain why baby boomers look for other options. Social Security is not sufficient to provide the income necessary to sustain an individual during their retirement years. Employers have moved away from defined benefit pension plans, and instead have opted for employer-sponsored tax-advantaged accounts. Traditional retirement savings are subject to volatile market conditions, and employment during the retirement years is often not practical, or even possible.

However, baby boomers have a disproportionate amount of their retirement savings in their homes. For most homeowners, in fact, the principal residence is the largest asset they possess. Therefore, draws from home equity during retirement have become more prevalent.

How does someone crack the home equity nest egg?

The equity that is created by home ownership is something of value that can be accessed for additional income during retirement. The home can indeed be used as a retirement nest egg, but it is difficult to crack for various reasons. Ken Scholen, whose research helped create the home equity conversion mortgage, wrote on this topic back in 1995:

“Some people have used their homes as retirement nest eggs. But to do so, they have to do things that most of us would rather not do – sell our homes and move elsewhere, or take out a loan against our homes and start making monthly payments.”

– Your New Retirement Nest Egg

His writing was an inspiration to me as I wrote my book, because his message is more applicable now than ever. Baby boomers do NOT want to leave their homes in order to access the equity they have built. Ken went on to say:

“For most of us, home equity is not a source of retirement income at all. We spend decades building up equity in our homes. But we never cash in on our most important investment. We never get to use the equity we’ve worked so hard for.”

We know that Reverse Mortgages were established to solve this problem. We can convert home equity into a line-of-credit or monthly cash payments. This can supplement other forms of retirement income. While it may be beneficial to wait and opt-in to Social Security later, the same is not true for Home Equity Conversion. It actually makes sense to obtain one early in retirement, make payments to reduce the loan balance, and watch the line-of-credit grow as another form of future retirement income.

– Dan Hultquist

To learn more about how reverse mortgages can be used in financial planning, subscribe to this website in the right-hand margin.

Last week, I wrote a piece that violated my personal blogging guidelines – it exceeded 700 words. Worse yet, I couldn’t wrap up the topic in one blog, and had to split it in two.

I fully recognize that Dave Ramsey has credibility on a national scale. But don’t take his word as gospel on the subject of reverse mortgages. For that matter, don’t take MY word on it without having done your own research. Fortunately, financial planners, retirement specialists, and academia have all done plenty of writing on the topic. The Journal of Financial Planning is loaded with data indicating that reverse mortgages offer significant financial planning advantages that homeowners should consider. In fact, reputable publications agree. The Wall Street Journal recently published an excellent article written by Professor Wade D. Pfau, which eloquently explains the non-recourse feature and line of credit growth.

“…recent research has demonstrated how financially responsible individuals can improve their retirement sustainability with a reverse mortgage.”

“These reverse mortgages are also non-recourse, which means that one never owes more than the value of their home. This can be useful in the event of declining housing prices, and for someone living sufficiently long, there is real possibility that the line-of-credit will actually grow to be more than the value of the home.”         

– Professor Wade D. Pfau (blogs.wsj.com) – The Case for Reverse Mortgages

So, as a continuation of last week’s blog, let’s discuss and clarify some basic concepts Dave Ramsey still doesn’t understand.

Misunderstanding #4 – “Crazy Fees: Fees on a reverse mortgage are expensive and can cost you 10% or more of the loan amount.” – Quote from Ramsey website

MOSTLY FALSE

Yes. There are fees just like any financial transaction, and reverse mortgage fees are not only federally regulated, they are also common to mortgage transactions. Dave’s “endorsed local providers” charge fees too, but whether they are expensive (or crazy) will depend on how the products are used and the alternatives. If Dave advocates selling the home instead, I can assure you the fees will be far greater. I’ve seen reverse mortgages in recent years where the lender pays all, or most, of the closing costs. But comparing the fees to the loan amount also shows his misunderstanding. A homeowner may have a few thousand in fees, yet not draw any home equity. In that case, the fees could be $5,000, and the loan amount would be $5,000. The fees would therefore be 100% of the loan amount. That doesn’t sound attractive until you recognize that the available and secure line-of-credit (LOC) may be $200,000 or more. That drops the fees to only 2.5% of the current outstanding benefit. This LOC also grows tax free, and can be converted later into tax-free retirement income.

Misunderstanding #5 – “You don’t make monthly payments, but if you sell the house or move out for more than a year, the loan is due and the income stops.” – Quote from Ramsey website

PARTLY TRUE, but misleading

Monthly principal and interest payments are surely not required. But Ramsey followers should instinctively ENCOURAGE homeowners to make payments, regardless of the financial tool. This will reduce their loan balance and increase their home equity. It will also boost their line of credit which, if needed, can be converted into retirement income later.

The last part of this quote is just silly – of course the loan is due when you sell the home. ANY lien against the home is paid off during closing when a homeowner sells their home.

Misunderstanding #6 – “The interest rates that they’re calculated at are horrendously bad.” – Quote from Ramsey website

WRONG!

Well, I guess it is possible that Dave may have inside sources that allow his followers access to 0% rates, but I promise it will not be a non-recourse loan requiring no monthly payments. The last time I checked, a 2.25% lender margin (2.411% starting rate after adding today’s 1-month LIBOR) is very attractive. On top of that, it is a non-recourse loan.

For homeowners that are using the reverse mortgage for financial planning purposes, however, there is a significant advantage in higher interest rates. 2.411% may be nice for someone carrying a large mortgage balance, but HIGHER interest rates can help other homeowners, as the available line of credit will grow that much faster.

The Truth

The truth is: Younger homeowners SHOULD view mortgages as debt. They should make every effort to pay off, or pay down, mortgage balances in order to build a real estate investment for the future. Nevertheless, the home equity created by this investment should be viewed as a nest egg that may be accessed during retirement. The federal government has allowed older homeowners to draw from this nest egg, tax free, and continue to stay in their home without a monthly payment. Doing so requires a lender, a lien against the home, and a federal agency to insure the loan.

For the masses of homeowners who have the majority of their wealth tied up in their homes, let’s make sure their options are clearly explained. No more misinformation. While there are reasons to avoid a reverse mortgage, Dave Ramsey has not identified them yet.

Subscribe to this blog to learn more, and for Part I of this blog, Click the link below:

Dave Ramsey’s Misunderstanding of Reverse Mortgages is Hurting Seniors (Part I)

Best-selling author, and nationally syndicated radio personality, Dave Ramsey, has helped millions of individuals find financial peace with his sound budgeting advice. While this is worthy of applause, the mainstream financial planning community regularly disagrees with his guidance. The Motley Fool even describes his retirement planning advice as “dangerous.”

It saddens me that while reverse mortgage professionals across America are passionately helping older homeowners with debt consolidation and prudent financial planning, Mr. Ramsey holds them back. One of the most misinformed “planners” in the country has one of the loudest voices. So, I feel compelled to call him out. What I find however, is that I am not alone. Many others have investigated, and written their concerns about this growing problem.

“He’s huge… which makes him being wrong about something important a real problem, because he can spread incorrect information like a virus, infecting millions of people, and causing significant harm as a result.” – Martin Andelman (Mandelman Matters) Why Can’t Dave Ramsey Get his Facts Straight on Reverse Mortgages?

“He writes books; He knows about money – He must be right, I should follow his advice AND teach others to follow his advice… This is a dangerous premise and one that is somewhat unpopular for me to write about.” – Harlan Accola (Wisconsin Christian News) The Fallacies of Christian Financial Advice

Initially, I thought the problem was simply a fundamental difference in the way we view home financing. Maybe his personal problems with debt that forced him into bankruptcy caused a heightened sense of hatred toward banks and lenders. But, it appears that he simply has not done his research. Some of what he says may have been true in the 60’s and 70’s before federal regulation of the industry. But claiming these things are true today, is no different than saying “Dave Ramsey has a debt problem, and is facing bankruptcy.” It is no longer true and irresponsible to say.

I have been through “Financial Peace University” and really enjoyed it, but Dave has had over 25 years (since reverse mortgages became federally-regulated) to get his facts right. So, let’s discuss and clarify some of the concepts the he doesn’t explain correctly.

Misunderstanding #1 – “because interest accrues over the life of the loan, your debt can ultimately exceed the value of your home.” – Quote from Ramsey website

WRONG!

One of the first items addressed in nearly every basic training on reverse mortgages is that FHA insures against this ever happening. The FHA GUARANTEES that homeowners and their heirs will NEVER owe more than the value of their home. This is called a “non-recourse” clause, and is not only a primary consumer advantage, it is something that every reverse mortgage applicant is required to be counseled about.

Misunderstanding #2 – “You are also required to take a loan for the maximum amount you qualify for.” – Quote from Ramsey website

FALSE!

Not only false, the Federal Government PROHIBITS borrowers from taking all the proceeds up front unless needed to pay off large mortgage balances or other mandatory obligations that must be satisfied at closing. Yes, fixed rate products only allow a one-time distribution, but homeowners have ALWAYS had options where full distribution was not required. Even with the fixed rate, homeowners had the option of paying down loan balances at any time with funds they didn’t need.

Misunderstanding #3 – “If your loan exceeds the value of your home, you or your heirs will have to make up the difference if the home isn’t sold when the loan is due.” – Quote from Ramsey website

UNTRUE!

Once again, he has not read the federal regulations and consumer protections that are fundamental to this program. The non-recourse feature prevents any recourse to the homeowner or their heirs. In addition, the home is rarely sold when the loan is due. The heirs are given ample time to sell it and receive their inheritance if the homeowner has passed away with home equity. If no equity exists, the heirs may obtain the home at a discount (95% of appraised value). Yet, even if the home doesn’t sell, there is no recourse. The heirs do NOT have to “make up the difference.”

The Truth

The truth is: There are really good reasons NOT to get a reverse mortgage. I will write on that topic shortly, but Dave Ramsey’s blanket statements condemning the product are hurting older homeowners.

The truth is: Seniors HAVE lost their homes after getting a reverse mortgage. Yes, it is possible for ANYONE that owns a home to lose it. If you stop paying your property taxes, you may risk losing your home. That is true whether you have a reverse mortgage, forward mortgage, or no mortgage at all. Instead of scaring seniors, the reverse mortgage should actually REDUCE the fear that this will happen. Periodic draws from their home equity should actually INCREASE their ability to pay their property charges.

The truth is: reverse mortgages can be very effective at debt reduction, which is a passion that I share with Mr. Ramsey. Imagine paying off tens or hundreds of thousands of debt with reverse mortgage proceeds that allow homeowners the ability to pay off the new loan balance much faster, at interest rates in the 2%-4% range.

Subscribe to this blog to make sure you don’t miss part II next week.

“Top executives and related professionals in the mortgage industry are encouraging friends and family members to obtain Reverse Mortgages. In many cases this is happening even when a homeowner has no immediate need for one. Could there be significant non-traditional uses for Reverse Mortgages that create an advantage for more than just the desperate and needy?”

– Understanding Reverse

The quote above is how I chose to begin my book. This is because the general public still considers Home Equity Conversion to be an act of desperation, not one of financial prudence. When celebrity spokespeople and a small percentage of mortgage professionals are the only ones who understand the financial planning advantages of a reverse mortgage, then we find ourselves with a knowledge gap and an industry perception problem.

The National Reverse Mortgage Lenders Association (NRMLA) and researchers within the Certified Financial Planner community have been trying to change this perception. Yet, in meeting with financial planners, I still get the same puzzled response – why would you want to get one when you are not desperate or needy? I then hand them a copy of my book.

I decided to ask other NRMLA Certified Reverse Mortgage Professionals (CRMP) how they would structure their reverse mortgages.

Professional #1

“I would definitely take a HECM for the purpose of LOC (line-of-credit) growth. I would pay the closing costs upfront and carry a minimal balance so as to make this an ‘investment’ in the LOC growth for future use.”

Professional #2

“My current residence is not where I want to spend the rest of my life. When I retire, I will sell it and use a ‘HECM for purchase’ to buy my new residence. This will provide a sizable contribution toward the sales price of a home where I will spend the rest of my life. Any cash left from the sale will be reinvested for additional retirement income.”

Professional #3

“I’d take a HECM for the LOC, but I expect to have a mortgage balance at 62, so the reverse mortgage would pay that off, but I would continue making payments into the HECM LOC to ensure that money is there when I need it.”

Professional #4

“I will be signing the paperwork the day after turning 62. I will have a loan balance, but I will make regular payments. This will reduce my balance and boost my LOC as a 2^nd source of retirement savings. Starting early will maximize the LOC’s compounded growth.”

They plan on using the ARM product to maximize guaranteed future cash flow that a Reverse Mortgage LOC can provide. This strategy is also enhanced when interest rates go up – the LOC grows even faster.

The strategy of obtaining a HECM early in retirement and converting liquid home equity late in retirement is generally not advertised. The Reverse Mortgage is more than a solution for the desperate. It can give retirees confidence that they will be less likely to run out of money, and it can take pressure off retirement portfolios.

Stay tuned to learn more about how to extend retirement assets beyond what traditional retirement planning can offer.

“There are significant advantages in making payments toward HECM loan balances that are not well known. Many homeowners are too intrigued by the fact that HECMs don’t REQUIRE a payment. Unfortunately, they miss a great opportunity to maximize some advantages of a HECM.”

– Understanding Reverse

Why would homeowners voluntarily make payments? The reverse mortgage, or Home Equity Conversion Mortgage (HECM) doesn’t require monthly principal and interest payments through the life of the loan. In fact, isn’t that a common selling point of the product?

Part of the confusion is that many older homeowners think obtaining a reverse mortgage means giving up their equity (and the home) to the bank. Why make payments, when you don’t own the home? But that’s not the way the HECM product works. The homeowner continues to own the home through the life of the loan, and reducing the loan balance will increase their equity position.

So, the decision to make periodic payments depends on the motives of the homeowner and his or her ability to make payments. According to HUD Handbook 4235.1, a borrower may “choose to make a partial prepayment because his or her financial circumstances have improved and he or she wishes to preserve more of the equity in the property.” A homeowner may also use payments to increase future monthly payouts, or to “set up or to increase a line of credit.”

That last phrase, “increase a line of credit” explains the movement toward using HECMs for financial planning purposes. Yes, the line of credit (LOC) will actually grow with each payment and be secured for later use. The available LOC will also grow naturally at the current interest rate plus 1.25%. This will give the homeowner even more accessible funds in retirement, regardless of future home value.

Keep in mind, the Fixed Rate HECM does NOT offer a Line of Credit. Prepayments will reduce the loan balance and increase homeowner equity, but that is the extent of the impact. However, when homeowners make payments toward Adjustable Rate HECM loan balances,

1. the homeowner’s loan balance DECREASES,
2. the homeowner’s equity position INCREASES, and
3. the homeowner’s Line of Credit (LOC) INCREASES.

When a servicer receives a payment, FHA requires certain items to be paid back first. Known as a “prepayment waterfall”, this is important for accounting and tax purposes.  However, the LOC doesn’t care whether the payment was applied to accrued mortgage insurance, interest, or principal. It just knows the loan balance went down.

Be aware that borrowers cannot pay more than their loan balance to gain a larger LOC. In fact, paying it off completely will close the HECM. This would be unfortunate for those wanting to use it later in retirement.

The ability to make payments to reduce loan balances and secure a larger LOC for the future is a prudent financial planning strategy and should be great news for every older homeowner.

“Quite possibly the most amazing feature of the adjustable rate HECM product is the line of credit (LOC) and its ability to grow. It is only available on the adjustable rate products, and it is unique in the world of finance. It is also the primary reason Reverse Mortgages are useful in financial planning.”

– Understanding Reverse

The Home Equity Conversion Mortgage (HECM) is offered at FIXED rates, which is fine if you want a one-time distribution of funds. The ARM products, however, offer homeowners the flexibility of monthly payouts and an open line of credit. This means one can borrow from it at any time, pay it down, and borrow from it again without restriction. In fact, many will use the LOC to manage cash flow.

There are so many great advantages to having a HECM LOC that I feel I have to list a few here:

• The LOC is LIQUID. If you need funds they are easily accessible. Just simply request them. For this reason, it is an effective emergency fund.
• The LOC is SECURE. The LOC is not capped, reduced, frozen or eliminated as a result of market conditions or property value declines.
• The LOC is NOT “BORROWED” until drawn. For this reason, the available LOC does not accrue interest and mortgage insurance.
• The LOC GROWS.

LOC Growth

There are two things that cause HECM LOCs to grow – time and payments. I won’t cover the math behind it here, but the homeowner’s Principal Limit (borrowing capacity) grows naturally at the same compounding rate of the loan balance. This is what produces the increase. For this reason, increases in interest rates can be advantageous for some homeowners as their LOC grows even faster.

Homeowners can also increase their LOC by making payments to reduce their loan balances. The lesson to be learned is that if a homeowner has cash available, it may be prudent to pay down the Reverse Mortgage balance. This will boost their LOC.

Declining property values don’t impact the LOC growth. Consequently, the LOC may even grow to exceed the home’s value. This can also occur when a homeowner holds a LOC for longer periods, or when interest rates rise dramatically causing the LOC to grow faster.

Important to understand

Be aware that if you intend to keep the LOC for financial planning, make sure not to pay down your loan balance completely. This could close your reverse mortgage and close your LOC.

In addition, only the available LOC grows. Some borrowers use all of their funds and wonder why their LOC does not increase the next month. There is simply nothing left to increase

So when you begin to contemplate how you will use a Reverse Mortgage, consider the product type. If you want the predictability of a fixed rate loan, that is certainly understandable. If however, you want to maximize the financial planning advantages of a liquid, secure, and growing line of credit, choose the ARM product.

Order the newest version of my book today to learn more about how Reverse Mortgages can allow older Americans to have more financial freedom. Understanding Reverse is the most comprehensive guide for answering your most common questions about Home Equity Conversions.

“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

The ability to use a Reverse Mortgage to purchase a home is no longer “new”, yet the public is still in the dark. Clearly, the Home Equity Conversion Mortgage (HECM) is more versatile than anyone realizes. In fact, when I speak to seniors, financial planners, and even Realtors, the concept of purchasing a home with one is completely foreign. While I can’t cover all of the details in a blog, let’s cover some basics.

The Need

Older homeowners often find themselves wanting to, or needing to, relocate to be closer to family, downsize to a more manageable home, or even upsize to a retirement dream home on the beach, golf course, or active adult community.

A call I received this week is a common one; “My grandmother wants to move to the south to be closer to the kids and grandkids.” Having lived half my life in the north, I understand that moving to the south is attractive enough on its own. Yet, when physical limitations become a reality, or when individuals desire a closer connection to family, sometimes a move is needed.

The Contribution

In a HECM for Purchase, the lender will still be able to provide the same principal limit to the borrower as is customarily available with a Reverse Mortgage. Instead of giving the funds to the borrower, however, the funds are generally applied to the sales price of the new home. Depending on the age of the youngest participant, and the effective interest rate, a lender may be able to contribute principal limits of 30% to 75% of the home value toward the purchase of that home.

When selling a home and relocating, homeowners may find that this program allows them to have cash reserves upon relocating. Many will even use the remaining funds to supplement their retirement savings.

The Details

HECMs are specifically designed to be offered only for a borrower’s “Principal Residence.” This means that HUD will require the borrower to occupy the home within 60 days. Also, be aware that many mistakes can be made when the Realtor writes the sales contract. So make sure the Realtor understands HUD’s guidelines related to new construction and seller-paid closing costs for Reverse Mortgages.

Order my book today to learn more about how the Reverse Mortgage for Purchase allows older Americans to have more freedom with their housing. Understanding Reverse is the most comprehensive guide for answering your most common questions about Home Equity Conversions.

The proper definition of the non-recourse feature is “FHA guarantees that the borrower will not owe more than the home is worth at the time it is sold.” This should be comforting to every homeowner and their heirs. They can be assured that if a homeowner lives a very long time, or if property values drop, FHA will pay a claim to the lender so that nobody is harmed by the loan being “upside down” or “under water”.                     

– Understanding Reverse

This is a primary consumer protection that makes HECMs so attractive. What’s not to love about this provision? It is a tremendous advantage for older homeowners that removes much of the risk associated with homeownership. Because many are skeptical about this claim, I often get asked to prove the non-recourse feature really exists. So the book, Understanding Reverse, documents the federal regulations and relevant handbooks that give us guidance.

Can a Reverse Mortgage really guarantee this?

Yes. The homeowner is not responsible for the portion of a loan balance that accrues beyond the home’s value. Another common explanation is:

“THE HOME STANDS FOR THE DEBT”… NOT the homeowner

Unfortunately, many understand this phrase to mean that the bank takes the home. No. The homeowner retains title to the home through the life of the loan and can sell it at any time with no prepayment penalty. The non-recourse feature is simply there to protect the homeowner and the lender from “crossover” loss, that point where the sale of the home is not sufficient to pay off the loan balance. At the time the homeowner wishes to sell, they cannot be held responsible for the portion of the loan that exceeds the home’s value.

So, who pays for this?

Before you say this is too good to be true, this is why FHA collects mortgage insurance premiums. FHA’s Mutual Mortgage Insurance Fund (MMIF) is a collection of funds created specifically for this purpose. But who pays for it? The large pool of HECM borrowers pay for it indirectly through the insurance premiums that accrue on their balances.

The non-recourse feature may also allow the heirs to obtain the home for less than market value. After the last borrower has died, the non-recourse feature allows the heirs to obtain the property for either 95% of the home’s value or the loan balance, whichever is LOWER. Again, there is no recourse to the estate for this.

Order my book today to learn more about how FHA protects consumers and ensures that the heirs are not stuck with a bill. Understanding Reverse is the most comprehensive guide for answering your most common questions about Home Equity Conversions.

On a recent flight, the passenger next to me asked, “What do you do?” I have begun to enjoy seeing the reactions when I reply, “I educate others on the proper use of reverse mortgages.” Predictably, she replied, “I sure hope I never need one of those.” THAT reaction is precisely why I wrote UNDERSTANDING REVERSE.

I have spent several years studying, selling, and teaching the Home Equity Conversion Mortgage (HECM), the popular federally-insured reverse mortgage product. The conclusion I, and other industry professionals, have come to is this:

When I turn 62, I WANT a HECM.

The federal government has established guidelines that, while complex, make this a financial tool every homeowner age 62 and older should consider, whether they need it or not. As evidence, consider that executives in my industry are getting HECMs for themselves and their family members. Unfortunately, our understanding of the product is different than that of the average homeowner. It appears we need a better understanding of reverse mortgages.

In response, I have written a book, titled Understanding Reverse that addresses the most common questions I get. The goal was not only to simplify the new reverse mortgage, but also to create a reference guide for answering those questions in the most compliant way. The book begins by answering the basics – what is a reverse mortgage? Every chapter that follows builds on previous chapters until the reader has a more comprehensive understanding from which to make financial decisions.

This web page, on the other hand, will include ongoing blog discussions about reverse mortgage concepts. This should also contribute to a better understanding of the product.

In addition to being an author and educator, I am the only Certified Reverse Mortgage Professional (CRMP) residing in Georgia. If you know someone curious about reverse mortgages, share this link. From here they can purchase the book and stay current with ongoing discussions through this blog.

For the other mortgage professionals that follow my writing, I would love to see your comments about how you plan to use a reverse mortgage during retirement.

As I post more blogs on this site, you will find that I am passionate about educating the public and correcting misconceptions. In fact, the skeptical passenger has since reached out to me for more information and is exploring her options. Whether she decides this is an option for her or not, that is one additional homeowner that now has a better understanding.

Dan Hultquist