Author Archives: Dan Hultquist

How and when does my reverse mortgage rate adjust?

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 1st 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 1st was the Friday June 26th rate published on Monday June 29th, 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 1st 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.

Reasons to Consider Your Reverse Mortgage Options Now

It’s best to plan for retirement cash flow needs, and now is an ideal time for many homeowners to look at their options. In fact, those that believe that a reverse mortgage is a last resort may find that their options could be limited if they wait.

Keep in mind, the reverse mortgage industry must be careful not to create an undue sense of urgency. Advertisements that encourage seniors to “Act now” and “Don’t miss this time-sensitive opportunity” for their financial product are often irresponsible and are often considered unethical by regulators.

Therefore, don’t misinterpret my intentions with this title. In this blog, I simply hope to educate the reverse mortgage novice on certain product details and market conditions that could impact their retirement planning decisions.

1. Credit deficiencies can reduce your options

One difficult challenge for any reverse mortgage professional is getting a homeowner qualified after they’ve missed a mortgage payment or property charge payment. Since 2015, each lender must examine every applicant’s credit history and property charge history. If a homeowner falls short of HUD’s definition of “satisfactory,” then we’ll often need to set-aside enough principal to pay property taxes and homeowner insurance for that borrower over their expected lifetime. For many younger homeowners in high-tax regions, that could be as much as $100,000 of their principal that won’t be accessible. Does that leave the borrower with enough principal to pay off their existing mortgage and closing costs? Sadly, the answer is often no.

If you are running out of cash and might be forced to miss a required mortgage payment, property charge payment, installment debt, and even revolving debt, that could be a problem. It’s very important that you investigate your reverse mortgage options before those deficiencies occur.

2. Interest rates are very low right now

Keep in mind, many reverse mortgage products consider two types of rates – long-term rates, which we call “expected rates,” and short-term rates which we call the “note rate” or “interest rate.” Some will ask, “why do interest rate even matter? After all, there’s no required monthly principal and interest mortgage payment with a reverse mortgage, right?

That’s correct, but there are two reasons why today’s low interest rate environment makes reverse mortgages more attractive:

– When long-term rates are low, HUD allows lenders to offer homeowners a higher percentage of their home’s value. If you don’t need the additional funds, the unused portion is securely held in a line-of-credit that may be available for future use. In essence, today’s low expected rates make the initial line of credit larger.

– When short-term rates are low, the amounts drawn from the reverse mortgage will accrue interest at much slower rates. Recently, some homeowners were seduced by record low rates on the 30-year fixed rate mortgage. However, many failed to notice that rates on the federally insured reverse mortgage product were even lower.

3. Market volatility

It’s hard to tell how the stock market will perform during a recession. But for retirees, that is often a poor time to draw monthly cash needs from assets that may decline in value. Some advisors will call this “sequence of returns risk.” For younger investors, a bear market is a great opportunity to buy more shares at reduced prices. However, retirees naturally pull money OUT of the market. This means they are selling investments at the worst possible time. Some call this “volatility drain.

Consider a $100 investment that declines 50% to $50. Many investors will incorrectly assume that a 50% gain will bring them back to their original value. But of course, that investor would need a 100% gain to get back on track.

Now imagine this investor was a retiree who removed $10 from the portfolio when the market was down. That retiree would need a 150% gain ($60) to get from $40 back to $100. That is the essence of volatility drain.

Fortunately, home values have remained stable, for now. Tax-free distributions from the home equity nest egg can potentially reduce your tax liability and protect a struggling retirement portfolio during this crisis.

If you, or a loved one, feels the need to leverage their home equity for any reason (e.g. retirement cash flow, in-home care, home repairs, tax strategies, etc.), then please do your research. Purchase a copy of Understanding Reverse and reach out to me or another qualified reverse mortgage professional.

Dan Hultquist, MBA, CRMP

What is necessary to PAY OFF a HECM?

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

Can a Foreclosure Occur with a Reverse Mortgage?

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

What is a Proprietary Reverse Mortgage?

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:

HECM or Proprietary Reverse Mortgage?

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.

Reasons NOT to Consider a Reverse Mortgage

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.

  1. 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.Door

  1. 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.

  1. 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

Home Purchase with a Reverse Mortgage

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.

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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 2nd 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

Don’t Confuse Me With Reverse Mortgage Facts

I can understand why there are reverse mortgage skeptics. The product is unfamiliar to most, and confusing to others. Unfortunately, no number of charts, mathematical calculations, HUD guideline references, or even my book, will ever change the minds of many that need to experience it to believe it. Like many in my industry, I must continually defend my profession to a public that often disagrees with me, but without the facts to make an educated decision.

An interesting conversation in a hotel lobby last month highlighted this defense:

Stranger: “So what brings you to San Diego?”

I’m here discussing Home Equity Conversion Mortgages, what many call “Reverse Mortgages.”

“You do know that reverse mortgages are a scam, right?”

Well, surveys show that nearly 90% of customers say they are “satisfied” or “highly satisfied” with their decision. That is extremely high for a financial product. Scams have near-zero satisfaction ratings.

“But the bank gets your home.”

That’s the most common misconception. The homeowner holds title to the home, and when they die, the home still belongs to the estate.

“Ok, but all the equity is gone, so that’s the same as losing your home.”

Actually, research indicates that most borrowers today gain equity in their first year. From there, it is generally up to the borrower to determine if they wish to consume all their equity over time.

“Ok, but the fees are so high, and you can’t defend that”

When you say “high”, to what product are you comparing? All forms of insurance and retirement cash flow have costs. Draws from a 401k are taxable, but draws from home equity are not. The fees are similar to traditional FHA loans, but the reverse mortgage offers so much more in future security. Some find the growing line of credit to be a less expensive way to fund future in-home care. In fact, others have saved more in taxes than the costs.

“You have no idea what you are talking about.”

Actually, I’m here teaching a course on this topic, and I wrote a popular book on this topic.

“Well then, you should be in prison making license plates.”

I didn’t have the heart to tell her that most states no longer allow prisoners to make license plates. Of course, some people don’t want to be confused with the facts.

When I stopped chuckling, I typed the conversation into my phone to share with my class the following day. Of course, we all had a good laugh. However, it is sad that, like many baby boomers, she hit four of the Top 10 misconceptions in a two-minute conversation, yet she continues to reject a product that was created specifically for her generation.

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

Dan Hultquist

The Ideal Reverse Mortgage Candidate May Surprise You

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

Waiting Comes at a Cost with Reverse Mortgages

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

Colder Winter May Fuel Reverse Mortgage Demand

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.

Understanding Reverse

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

The Reverse Mortgage: Is it really that complicated?

Is the Reverse Mortgage as simple as some claim? Or is it a highly complex financial tool, as the Consumer Financial Protection Bureau describes it?

While it may appear that these views are mutually exclusive, they are not. However, the underlying concern is one that congress, regulators, financial planners, lenders, and consumers all need to better understand.

THE REVERSE MORTGAGE CONCEPT

The reverse mortgage concept is simple and can be explained in a sentence or two. In its most basic sense, a reverse mortgage is any loan program that defers the repayment obligation until a later date.

More specifically, it offers a homeowner the ability to use a portion of his/her home’s equity, it creates a lien, and it delays repayment until the home is no longer the primary residence of the last borrower. That is pretty basic and easy to understand. This holds true for all reverse mortgages, including the Federally Insured Home Equity Conversion Mortgage (HECM), single-purpose reverse mortgages offered by local government entities, and proprietary reverse mortgages.

THE HECM PRODUCT

However, the “concept” of a reverse mortgage and the “product” itself are quite different.

The Consumer Financial Protection Bureau (CFPB), which is charged with a degree of oversight of the mortgage world, believes the reverse mortgage is complex. In 2012, the CFPB commented on the complexity of the HECM product in their 231-page Report to Congress stating,

Reverse mortgages are inherently complicated products that are not easy for the average consumer to understand.

Looking back, it’s hard to imagine this was said in 2012. At the time, training and education on the product was relatively easy. All that was needed was to simply educate mortgage originators and clients on the program guidelines, the non-recourse feature, principal limit factors, product options, payout options, and costs.

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REGULATORY CHANGES

Only 15 months after the CFPB report was published, the program saw massive regulatory changes. These changes from 2013-2015 were intended to protect the HECM program, protect the consumer, and ensure the product was used as a sustainable solution for homeowners. Nevertheless, in a short period of time, the complexity of the reverse mortgage product doubled.

Does that mean the product is complicated? Not necessarily. The issue is not one of complexity, but rather a lack of familiarity. The HECM product is misunderstood simply because the terminology and concepts are somewhat unfamiliar.

As a result, industry training is quite different now, including the addition of the following concepts: initial disbursement limits, non-borrowing spouse, and financial assessment.

IS THE REVERSE WORLD MORE COMPLICATED THAN THE FORWARD?

I received what many believed was the best forward mortgage training available when I entered the industry. Completing it took me away from home for several weeks. Having a comprehensive understanding of the forward side DOES takes time. In fact, forward originators must now comply with TRID requirements which is not mandated for the reverse side… yet.

But, while various forward product options each have their own credit requirements and debt-to-income ratios, most consumers already understand the dominant product – the 30-year fixed conventional loan. By contrast, the dominant reverse product (The HECM) and the terminology that accompanies it are relatively unknown.

Once again, the primary issue for mortgage originators, financial service professionals, and consumers alike is becoming familiar with the HECM product.

Note: To be a licensed mortgage loan originator, the standardized testing (SAFE Exam) generally includes only one question on the topic of reverse mortgages.

DO NEW REVERSE MORTGAGE STRATEGIES INCREASE THE COMPLEXITY?

Yes. Wendy Peel, VP of Sales and Marketing at ReverseVision, notes that “much of the complexity lies within the varied strategic uses of the new reverse mortgage product.” Prior to 2013, reverse mortgage sales had little to do with financial planning and more to do with how much money the borrower could receive. In 2013, the program began limiting many borrowers to an initial disbursement of 60% for the first year. This, combined with an increased focus on sustainability, shifted the product back towards the financial planning uses for which it was originally intended.

Mathematically, research shows us the financial planning advantages are significant. Unfortunately, many loan originators, consumers, and most financial planners are still uncertain how to use reverse mortgages to open up retirement cash flow options and strategically manage portfolio draws in retirement.

IS IT WORTH EXPLORING?

Yes. Don’t let the unknown discourage you. The primary reason I wrote the book, Understanding Reverse, was to answer the most common questions, summarize the program guidelines, and document the regulatory sources. In fact, one of my greatest pleasures is receiving emails and letters from loan originators and consumers who thank me for clarification gleaned from the book.

The HECM product is the most under-utilized financial tool available to enhance the lives of older homeowners. We can easily solve the perceived complexity problem with proper education, not just offered to the loan originators, but also to financial service professionals, realtors, the media, and the clients themselves.

Yes, the concept is beautifully simple. Yet, the product appears complex because of a lack of familiarity with regulatory changes and appropriate financial planning uses. As we continue to develop new ways to explain this great program to a broader audience, I know we can build a better understanding of reverse mortgages.

 

I’d love more discussion on this topic. So, please let me know your thoughts? If you wish to attend my national broadcast on the Financial Assessment changes on October 3rd, please register by clicking this link:

Financial Assessment Review and Updated Compensating Factors

Dan Hultquist is the Director of Learning and Development at ReverseVision and authored the top-selling book on this topic, Understanding Reverse – 2016.

Getting Back to Reverse Mortgage Basics

With the regulatory overhaul over the last three years, and with more to come, the reverse mortgage program has gained positive attention in the national media and financial planning community. But, the basic concepts that every older homeowner should know have remained unchanged for the most of three decades. So, since other blog posts, including my own, discuss changes, this may be a good time to take a breather and review the core of the reverse mortgage program and what it offers.

The following is a summary of the top 10 most important concepts on my list:

  1. What is a reverse mortgage?

The most common product, known as a Home Equity Conversion Mortgage (HECM), is a federally insured loan product that allows homeowners 62 years and older to access a portion of their equity now in cash or monthly payments, or later from an established line-of-credit.

  1. What are the primary advantages?

Many clients like the freedom of having no required monthly principal or interest mortgage payments. However, they often miss the advantages gained by making periodic prepayments. Of course prepayments will reduce the loan balance. But when using the adjustable rate HECM, those payments will also boost the government-insured line of credit that is already growing.

  1. Who use Reverse Mortgages?

Older homeowners seeking reverse mortgages are a mix of those with a need for cash, those who wish to enhance their retirement lifestyle, and those with financial planning motives. However, since 2008, the reverse mortgage has also had the ability to assist those that wish to purchase a home.

  1. What are the borrower responsibilities?

It is the borrower’s responsibility to occupy and maintain the home. However, he/she is also required to pay the property charges including property taxes and homeowners insurance when due, unless the lender sets aside funds for those purposes.

  1. What is the most common misconception?

Clearly, the greatest misunderstanding is that the “bank gets your home.” This is not true, and the homeowner retains title and ownership of the home over the life of the loan, and the heirs have multiple options upon the death of the last borrower.

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  1. What do the proceeds potentially impact?

Proceeds are NOT taxed as income. While the HECM may be used to enhance basic Social Security and Medicare, the proceeds don’t adversely affect those government benefits. However, Supplemental Security Income or Medicaid are means-tested programs that may be impacted if caution is not taken.

  1. What is the “Principal Limit?”

The Principal Limit represents the maximum funds that can be offered at the time of closing. This amount is tied to the relevant ages, interest rates, and the home’s value, but may be restricted in some cases during the first year.

  1. What is the non-recourse feature?

The homeowners and their estates will never owe more than the value of their homes. This is a great consumer protection for the homeowners as well as their heirs, as there is no personal liability for a deficiency created by falling home prices or a loan balance that exceeds the value of the home.

  1. Why is counseling required?

HUD felt it was important for the homeowner to be counseled by someone other than the loan originator. Therefore, a reverse mortgage applicant will need to select a HUD-Approved counseling agency and obtain a counseling certificate.

  1. What are the Financial Planning strategies?

Many are using the HECM to delay Social Security filing. Others will draw tax free distributions from their home equity, allowing them to manage their adjusted gross incomes. This may reduce their tax liability as well as Medicare premiums. Still others will draw retirement cash flow from home equity during down markets to preserve their traditional retirement funds.

For more information on the reverse mortgage product and its recent changes, please purchase Understanding Reverse – 2016. For updates on the newest round of changes, stay tuned by subscribing to this blog.

Dan

Let’s Openly Discuss this Reverse Mortgage “Scam”

Reverse mortgage lenders have been fighting an uphill battle for years. And blogs and online debates likely won’t change the overall perception (or misperception) about reverse mortgages. There will always be those who can’t help but voice their opinions about a product they simply don’t understand. Nevertheless, as an advocate for proper home equity conversion for retirement cash flow, I’m often the recipient of these negative comments. So, let’s openly discuss the so-called reverse mortgage “scam.”

The media is generally pretty quick to jump on scam coverage. And yet, the national media has actually reacted favorably toward the product reforms of the last three years, and the coverage on the topic has been positive. In addition, publications like Forbes and the Wall Street Journal have touted the prudent aspects of reverse mortgages, adding academic research from respected retirement experts like Jamie Hopkins, Wade Pfau, and others. In this respect, the financial media, and the academic community are way ahead of the game, and offer credible arguments in support of reverse mortgages.

Financial AssessmentYet, any time such articles are published in the media touting the merits of reverse mortgages, there will be those who reply “It’s a SCAM!”, “Stay away!”, and “There is a sucker born every minute”. These comments continue to show how poorly the public understands the terms of the product, and I naturally feel compelled to reply.

These negative sentiments have persisted as a result of the unregulated products offered by financial service “professionals” since the 1960’s. The truth is, reverse mortgages have been highly-regulated and safe products since the Federal Housing Administration first insured the Home Equity Conversion Mortgage (HECM) product in 1989.

In fact, Ohio State University recently released a study showing that 83% of seniors were either “satisfied” or “very satisfied” with their decision to obtain a reverse mortgage. That’s extremely high for ANY financial product. Clearly, it is not a scam, a failed government program, or a bank trying to take a home.

One argument for the Home Equity Conversion is that it is insured by the U.S. government. Well, that’s probably a poor argument. Even though I believe the Reagan administration got this one right, we live in an age where distrust of the government is at an all-time high. So there may be more effective ways to debate its validity.

In fact, I have found that replying with a simple question is a great way to open up an honest conversation – “what about them makes you think it is a scam?

  • Is it because you believe the bank takes title of the home?
  • Is it because you believe the homeowner can owe more than the value of his/her home?
  • Is it because you believe these are similar to subprime loans?
  • Is it because you believe they are too expensive for what they provide?
  • Is it because you believe they stick the heirs with a bill upon the borrower’s death?
  • Is it because you believe those who get them generally regret their decision?

None of these are beliefs are true, and yet they account for many of the objections people have about the product. Asking about their objections opens the door to education, and learning the facts from a specialist should reduce fears.

The good news is that the Financial Planning community is beginning to understand the advantages, and many now base their recommendations on research from the academic community. Top-selling author, Jane Bryant Quinn, has a very good understanding of the product and now advocates for reverse mortgages in her recent book, How to Make Your Money Last. Sadly, Dave Ramsey is still misinformed and refuses to recognize the research of his peers, as well as published papers within the Journal of Financial Planning.

We’ll continue to see comments like “worst idea ever,” “people get screwed,” and “just give the home to the bank”, and I’ll still respond. But the media, academia, and the financial planning community are moving the perception needle from “scam” to “strategic use of home equity.”

Dan Hultquist

The Reverse Mortgage, Taxes, and Government Benefits

“Accessing a large sum of cash from home equity and placing it in a bank account might be a problem for certain benefits that are “means-tested.”

 Understanding Reverse

Will getting a reverse mortgage impact my government benefits and/or my income taxes? These are major concerns that come up frequently when speaking to homeowners, especially during the month of April. And, for disclosure purposes, my first response is always:

“Keep in mind, reverse mortgage professionals are not a tax planners or financial planners, and rules regarding these items are always subject to change.”

Nevertheless, I offer general guidelines in my book, and in presentations to consumers, regarding both government benefits and taxation.

WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY GOVERNMENT BENEFITS?

Maybe. As stated above, accessing a large sum of cash might pose a problem for some “means-tested” benefits. A means-test is a way of determining whether someone has the “means” to do without the assistance. Therefore, it will all depend on the answers to these two questions:

  1. Is the government benefit affected by means-testing?
  2. Is the amount drawn in excess of the benefit’s limits?

SOCIAL SECURITY AND MEDICARE

Basic Social Security benefits are not currently means-tested, and only a portion of Medicare is adjusted based on a homeowner’s income (MAGI or Modified Adjusted Gross Income). Therefore, we can safely say that Social Security and Medicare are NOT adversely affected by Reverse Mortgage proceeds.

SUPPLEMENTAL SECURITY AND MEDICAID

However, Supplemental Security (SSI) and Medicaid have income and/or asset requirements. It will be important to know what amount, held in a bank account, could prevent one from receiving those forms of assistance. As a result, it may be best to leave all available reverse mortgage funds in a line-of-credit, and only access those funds for specific expenses (e.g. roof repair, stair lift, bathroom remodel, etc.). Furthermore, it is always a best practice for the homeowner to consult with a benefits administrator financial advisor to make sure they are not disqualifying themselves.

Will getting a reverse mortgage impact my government benefits?

CAN A REVERSE MORTGAGE IMPROVE MY GOVERNMENT BENEFITS?

Yes it can! Draws from Home Equity are not taxed as income. Therefore, showing a lower Adjusted Gross Income can reduce premiums surcharges for that portion of Medicare that is means-tested on income.

In addition, even small draws from a reverse mortgage may eliminate the need to file for Social Security benefits too early. Delaying social Security may have significant advantages until age 70, and even a one year delay can improve a homeowner’s retirement cash flow.

WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY TAXES?

This is another major concern that comes up frequently when speaking to homeowners.  Draws from home equity are not considered a taxable event (Federal or State Income Tax) and therefore do not adversely impact income tax liability.

However, if funds are drawn and placed into a bank account, they become an asset where interest may be earned. Any interest received from a new, or higher, bank account may be taxable moving forward.

On the flip side, when a homeowner draws part of their monthly cash needs from home equity instead of a taxable retirement income source, they may have the opportunity to reduce their marginal tax rate, which, in turn, can reduce their overall tax liability.

In addition, there may be cases where accrued interest, paid on a reverse mortgage loan balance, may be deductible just as with traditional, forward, mortgages. Keep in mind, reverse mortgages do not require monthly principal and interest payments. So, interest will generally accrue, but is not “paid”, and there can be no potential deductions unless a borrower actually makes prepayments.

Dan Hultquist

To learn more about how reverse mortgages, and how they can be used in financial planning, subscribe to this blog in the right-hand margin and get a copy of the top-selling book on the topic – Understanding Reverse.