tag:blogger.com,1999:blog-5621914599310831423.post6247740844141391142..comments2024-03-28T18:17:18.688-07:00Comments on The Retirement Café: Reverse Mortgages: When the Last Resort is the Best ResortDirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-5621914599310831423.post-85526011573927022112016-10-23T07:08:50.377-07:002016-10-23T07:08:50.377-07:00John, you qualify for a conventional mortgage with...John, you qualify for a conventional mortgage with income, but you qualify for a reverse mortgage with age. The minimum age for a HECM is 62 and the older you are, the more you can borrow. Covering all of this in a blog post would be difficult. I suggest you read <a href="https://www.amazon.com/dp/B014ONKPRQ/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1" rel="nofollow">Shelley Giordano's book</a> or check out the <a href="http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmhome" rel="nofollow">HUD website</a> for more details.<br /><br />There are two types of HECM's: fixed rate and adjustable rate. The fixed rate loan has, as the name suggests, a fixed interest rate and you can only take the distribution as an initial lump sum. With an adjustable rate, you can choose to treat the loan as a line of credit.<br /><br />You can choose an annual or monthly adjustable rate mortgage. The rate will be based on the appropriate LIBOR rate plus a lender margin. I have recently seen quotes from 3% to 4.75% for the lender's margin, depending on how much up-front costs you are willing to pay (more upfront costs equals lower margin). <br /><br />In addition, you will pay a mortgage insurance premium (MIP). There is an up-front MIP and an ongoing MIP that adds 1.25% to the loan payment. So, your loan payment will equal the LIBOR rate (monthly or annual) plus the lender's margin plus the MIP (1/12th the MIP for monthly).<br /><br />The reason to open a HECM line of credit now isn't because you'll pay less interest (you will now, but that rate will adjust when interest rates inevitably rise). The reason is because, due to the unique way in which a HECM line of credit grows, adjustable-rate loans that start out with today's higher maximum loan amount ($625,500) and interest rates that are more likely to rise than fall should see the borrowing limit grow faster, leaving you with the ability to borrow a larger percentage of your home's fair market value in a decade or more.<br /><br />This is the basis for the strategy of opening a loan today and not using the money until later in retirement. If HUD lowers the maximum loan amount in the future, interest rates rise, or both, this strategy becomes less interesting.<br /><br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-18250900386687993182016-10-22T23:12:18.015-07:002016-10-22T23:12:18.015-07:00Dirk, not sure if you covered this in previous pos...Dirk, not sure if you covered this in previous posts but can you add more details to your statement "my advice is to consider opening a HECM line of credit today, while interest rates are low". Is the HECM interest rate locked or is it like HELOC LIBOR+prime? Maybe a post on how HECM payments are calculated and also if there are age restrictions to open a HECMAnonymoushttps://www.blogger.com/profile/09355285956223392744noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-56188714871284613832016-10-21T09:33:22.049-07:002016-10-21T09:33:22.049-07:00Chris, that's an excellent question. The probl...Chris, that's an excellent question. The problem with HELOCs, and the one that started a lot of the academic interest in HECMs, is that the lender isn't legally required to loan you the money even after you have opened the loan. During the Great Recession, when money got tight a lot of HELOC lenders simply refused to loan money to people who had already set up the lines of credit for just such an emergency. A HECM lender is legally required to lend you the money from your line of credit. The HELOC can disappear when you need it, so even if it's cheaper it may not be a bargain.<br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-64554264460044231582016-10-21T09:05:21.219-07:002016-10-21T09:05:21.219-07:00Would it be less expensive to open a regular Home ...Would it be less expensive to open a regular Home Equity line of credit while still working and then only tap into that if absolutely necessary?<br /><br />I realize the amount that you can access will be much less, but then you aren't paying all of the RM fees and the interest rate could be more favorable.ChrisCDnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-55066094318132567902016-10-17T06:20:56.005-07:002016-10-17T06:20:56.005-07:00I wish I'd said that. :-)I wish I'd said that. :-)Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-36974269364616899662016-10-16T10:45:42.754-07:002016-10-16T10:45:42.754-07:00Here's the image that comes to my mind as I th...Here's the image that comes to my mind as I think of maintaining a standby LOC on a HECM.<br /><br />"In case of emergency, break glass."<br /><br />The vast majority of the devices with that label never get their glass broken, but it is comforting to know they are there to summon help if needed. (Well, in this day and age of ubiquitous cell phones, maybe they are pretty redundant, but back in the day, it must have been comforting to have these in place.)<br /><br />Of course, breaking the glass on one of these devices can be a lifesaver in time of real need, but it can also get you in BIG trouble if you break the glass for frivolous reasons.<br /><br />The same is true of the HECM LOC.Mary O'Keeffehttps://www.blogger.com/profile/14662977706706048151noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-44746089445965123912016-10-16T08:20:05.896-07:002016-10-16T08:20:05.896-07:00Jim, completely agree with your last paragraph and...Jim, completely agree with your last paragraph and especially your last sentence. But all those options need to be <i>carefully</i> explored because each has its advantages and pitfalls. Reverse mortgages have been unfairly reviled in the past but are sometimes over-hyped now. The web page for a HUD-referred HECM counselor, for instance, clearly (and falsely) states that you never have to repay a HECM until you die.<br /><br />As a (mostly former) retirement planner and researcher who doesn't sell any product, I like to think I can provide a more rounded view and avoid the marketing hype at both ends of the spectrum. Reverse mortgages are a great tool for some households and a poor one for others. Retirees need to consider them very carefully to figure out which applies to their situation.<br /><br />Thanks for the comment!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-27940726668194573472016-10-16T07:15:42.663-07:002016-10-16T07:15:42.663-07:00People in or facing retirement face many financial...People in or facing retirement face many financial challenges, and need to carefully consider all the options available to them to meet their needs. Until very recent years, the willful "ignore-ance" (to coin a phrase) of the options that the reverse mortgage can offer, by the financial advice community, has done a disservice to many (as did the focus of the reverse mortgage industry on the fixed-rate HECM in the period from 2009 to April 1, 2013).<br /><br />No one solution fits all, but all can benefit from knowledge of their options. The reverse mortgage offers options that can solve some problems for some people, but not all problems for all people all the time. <br /><br />In retirement, the more one spends down one's assets, the fewer paths one has open to future financial security, whether those options are one's investment portfolio or one's home equity. But many people will have no choice except to spend down assets at some point. Generally, when one spends down an asset, one gives up ownership of that asset (thus forfeiting any benefit from future appreciation of that asset). The reverse mortgage certainly does allow one to spend down the asset of their home, but since it does not entail giving up ownership of the home, the borrower retains at least the possibility of benefiting from future appreciation of the asset.<br /><br />This can be illustrated by Dirk's caveat that "Tenure payments last the life of the mortgage, not the life of the borrower." That is certainly a true statement, and is a feature that differentiates the tenure option from an annuity. However, with an annuity, one transfers an asset to an entity that bears the longevity risk, receiving lifetime payments in return for generally foregoing any possible asset appreciation. In contrast, tenure payments diminish (but do not necessarily extinguish) one's equity in the home, which may or may not appreciate in value over time. Further, at any time while resident in the home, the borrower can cancel the tenure payments and withdraw their remaining Net Principal Limit (or leave it in their Line of Credit), to pursue whatever other financial options may better meet their needs at that time.<br /><br />The shift away from defined benefit pensions has placed much more responsibility on individuals to figure out how to fund their retirement needs, meaning that they have to take more initiative to understand the options available to them. The HECM reverse mortgage is a federally insured program that offers options too few people have explored.Anonymoushttps://www.blogger.com/profile/02620994420825557946noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-16091832097431781562016-10-15T10:51:15.606-07:002016-10-15T10:51:15.606-07:00You're doing a great job Dirk! This series on ...You're doing a great job Dirk! This series on Reverse Mortgages (and the postings you have yet to make that I know are in your drafting stages) are excellent points and counter-points about how and when this tool may be properly used.<br /><br /><br />The key point you make if someone opens a LINE OF CREDIT early, is NOT to access it until it is absolutely needed. For some, an absolute need might be a new boat - which is an example about them feeling encouraged to spend just because they have access to money. Once money is taken from a reverse mortgage, that balance GROWS ... and thus leads to the issues you discuss above. If no money is taken, then there is no balance to be repaid and home equity is retained for those unplanned potential issues in the future.<br /><br /><br />Your last paragraph summarizes how someone might properly consider using these tools. But, it takes discipline to stick to the original intent of the plan - and not get glitter in the eyes when some desire comes along in the meantime. Real possible needs later in life need sticking to a solid plan with which a line of credit was taken out in the first place.<br /><br /><br />I'm looking forward to your future posts on this topic!Anonymoushttps://www.blogger.com/profile/17516328219004197356noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-62429701775362211442016-10-15T08:34:42.708-07:002016-10-15T08:34:42.708-07:00I think I read recently that about a quarter of ho...I think I read recently that about a quarter of households still have a mortgage at retirement and what you suggest is certainly a consideration.<br /><br />I do have a concern with this strategy, however. <i>Tenure payments last the life of the mortgage, not the life of the borrower.</i><br /><br />I posted this at <i>Advisor Perspectives</i> yesterday:<br /><br /> <i>As we have also discussed, if a HECM borrower finds herself unable to continue to afford the home (e.g., after a spending shock, divorce or death of a spouse) or no longer desires to live in the home (e.g., after a divorce or development of an infirmity), the borrower might find selling the home to be the best financial alternative. Doing so, of course, would trigger repayment of the HECM. In fact, since HECM foreclosures are apparently non-existent, this appears to be a more likely scenario for losing the home than property tax, home insurance or maintenance issues.<br /><br />The scenario that concerns me is one like the following. (Substitute any financial crisis in which selling the home is the best alternative.) A couple opens a HECM line of credit early in retirement, falls victim to “gray divorce” after borrowing many tenure payments and neither can continue to afford to live in the home, even without mortgage payments. In fact, neither DESIRES to continue living in the home. When they sell the home they must repay the HECM. Much of their equity has been spent and the tenure payments, upon which they were reliant, permanently stop. </i><br /><br />The response so far at <i>AP</i> has been that this is a valid concern.<br /><br />While each individual household needs to be considered individually and this strategy might indeed be best for some, the borrower needs to consider the possibility that a financial crisis could leave them without a home and with little remaining equity to pay for housing. Yours is probably prudent advice if the borrower understands that risk and the rest of the retirement plan anticipates it. If losing the tenure payments late in life would cost the retiree his standard of living, then a life annuity would be a much better idea.<br /><br />This is an area in which the retiree needs <i>retirement planning advice</i> that covers all the bases and not simply retirement product advice. The two should not be confused.<br /><br />I think reverse mortgages are a great tool for the right job, but they're not a panacea.<br /><br />Thanks for the comment! Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-10584425426101728662016-10-15T07:31:28.890-07:002016-10-15T07:31:28.890-07:00Dirk,
Another thoughtful posting. I applaud your...Dirk,<br /><br />Another thoughtful posting. I applaud your efforts to help educate people. Much more is needed.<br /><br />That said, there is another population often overlooked. In focusing on those already retired, it is easy to overlook those still working, but approaching retirement eligibility, who are still carrying significant house-related debt. For that population, the strategy of refinancing their mortgage/HELOC debt and continuing to make optional payments, is seldom emphasized. While it seldom makes sense for a retired person to make optional payments on their reverse mortgage, since that would usually entail converting other assets (and perhaps incurring otherwise unnecessary tax liabilities) into income which could then be applied to making the payment, a person working who converts their current mortgage payment stream into reverse mortgage payments derives multiple benefits. Making payments manages the growth (or decline) of their mortgage debt, while often also providing the tax deduction benefit of paying mortgage interest. But more importantly, it builds up the increasing (and not subject to income tax) liquidity of their home, through the growth features of the reverse mortgage line of credit. <br /><br />Recently, a reader of your blog whose situation exemplified this strategy contacted me. A person in his mid-60's, he anticipated being able to continue to work for a number of years. He reported mortgage debt of more than $150,000, a mortgage payment of more than $800 per month, and retirement savings of less than $500,000. Overall, he realized that funding retirement would be very challenging. By refinancing his mortgage with the reverse mortgage and continuing to make payments in the same range, however, he could set an achievable retirement goal of increasing his reverse mortgage line of credit to approximately $250,000. Converting that to tenure payments, along with Social Security and his existing retirement savings, created a much broader path to retirement income security that he is presently on.<br /><br />The reverse mortgage is a much more versatile retirement planning tool than most people realize, one that, as this person's situation illustrates, can enhance retirement security in ways that few other tools can.Anonymoushttps://www.blogger.com/profile/02620994420825557946noreply@blogger.com