Reverse Mortgage Training - Financial Planning Association
Reverse Mortgage Training Using HECMS in a Comprehensive Retirement Plan Finance of America Reverse | Slide 1 The New Perspective New academic research demonstrates how HECMs can play a vital role in retirement planning not just as a tool of last resort but as a strategic way to provide greater financial flexibility to seniors with ample savings.* *Salter, Pfeiffer and Evensky, Texas Tech University, Standby Reverse Mortgages: A Risk Management Tool For Retirement, Journal of Financial Planning, 2012.
Finance of America Reverse | Slide 2 The New Perspective, Cont. 2012 Sachs and Sachs, Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income, Journal of Financial Planning 2014 Wade Pfau, PhD, The Hidden Value of a Reverse Mortgage Standby Line of Credit, Advisor Perspectives. Finance of America Reverse | Slide 3 The Basics Finance of America Reverse | Slide 4
What Is a Home Equity Conversion Mortgage ? Loan that gives Borrowers access to a portion of their home value. No payments required until the last borrower permanently leaves the home. No-Recourse loan (lender can only look to property for lien satisfaction) Also known as a HECM Finance of America Reverse | Slide 5 HECM Eligibility Requirements All Borrowers must: -
Be age 62 or older Live in the subject property as their primary residence. Demonstrate Financial Capacity and Credit responsibility. Attend an FHA approved consumer counseling session. Finance of America Reverse | Slide 6 HECM Product Options FHA-Insured Products Fixed Rate Monthly Adjustable (10 pt. cap) Annual Adjustable (5 pt. cap)
Proprietary Program FARs HomeSafe jumbo program is a fixed-rate ONLY product, with a maximum loan amount of $2,250,000. Finance of America Reverse | Slide 7 How Much Value is Available? Formula: Max Claim Amount xs Principal Limit Max Claim Amount is lesser of FHA Lending limit ($636,150 nationally) or appraised value. Principal limit is published by FHA and based on the age of the youngest borrower or nonborrowing spouse and the Expected Interest Rate. - 10 Year Libor Swap rate plus Lender Margin.
Finance of America Reverse | Slide 8 Available Value, Ex: The amount of available value increases with the age of the borrower at application. Assume an MCA of $636,150 for these calculations, and expected rate of 5.06%. Available Value Principal Limit Factor Age 62 Age 76
Age 90 $333,343 $395,685 $477,113 52.4% 62.2% 75% Finance of America Reverse | Slide 9
How Can Value Be Accessed ? All Existing Liens Must be Paid off First. Remaining Balance Available As: A Line of Credit guaranteed to grow and compound. Tenure Income payments for life. Term Payments for specific amount and period. Cash Any Combination of These (Libor Products only) Fixed products have cash at close option only. Finance of America Reverse | Slide 10 Program Features
Finance of America Reverse | Slide 11 HECM Line of Credit Guaranteed to grow at the same rate as the interest and FHA Mortgage insurance premium that is being charged on any outstanding loan balance. Cannot be called due to a change in home value. Has no term limits or balloon payments. Funds can be accessed, paid back if desired, and accessed again at a future date. Any payments on outstanding loan balance automatically become accessible in the line of credit. Excellent risk management feature for fluctuating real estate values, stock market volatility, and long term care events. Finance of America Reverse | Slide 12
Credit Line Example-Real Estate Hedge In 2006, a 62 year old in Las Vegas owned a home worth $400,000, and secured a $235,000 HECM LOC. By 2011 the home was only worth $262,000. HECM LOC had increased in value to $281,720. Finance of America Reverse | Slide 13
Tenure Payments Reserve some or all available equity for guaranteed payments as long as the borrower is living in the home. Generally a higher payout than an annuity contract which is based on short term rates at the time of annuitization. Payment plan can be changed at anytime with a $20 fee to the servicer. Finance of America Reverse | Slide 14 Tenure Example - Fixed Income Planning Situation:
Pete is retiring at age 66. Has $150,000 pension distribution and considers an annuity option. Wants a guaranteed life income to supplement his social security. Owns $400,000 home and has $219,600 available from a Reverse Mortgage. Finance of America Reverse | Slide 15 Fixed Income Planning (Cont.) Annuity Solution HECM Tenure Guaranteed income
for life of $717* Use $150,000 of home equity for tenure payments of $824 **per month. Balance in LOC. Income will be taxable Payments are income tax free. * Based on annuity payout tables as of 3/20/2017. ** Based on 4.95% initial rate as of
3/20/2017. Roll over the $150,000 distribution to his IRA. Finance of America Reverse | Slide 16 Term Payments Define a specific dollar amount to be received for a specific period of time. Subject to available proceeds. Calculation for reserved proceeds includes the age of the borrower and a growth rate. Finance of America Reverse | Slide 17 Term Payment - Social Security
Planning Situation: In 2015, Dave is 66 and planned to work to age 70. He was in good health, longevity in his family, and anticipated he will need the higher social security benefit of $3506 per month, verses $2603 at his current age. Becomes a victim of corporate downsizing and is now out of work. Finance of America Reverse | Slide 18 Social Security Planning (Cont.) Solution: He owns a $350,000 house and is eligible for
$191,000 in HECM proceeds. Selects Term payment of $2600 per month from HECM for 4 years until he can get the maximum Social Security benefit. Allows 401K and IRA to continue to compound tax deferred. Finance of America Reverse | Slide 19 Other Strategic Uses for Home Equity Finance of America Reverse | Slide 20 Manage Sequence of Returns Risk What is Sequence of Returns? -
Order in which annual returns are credited to an investment. - Does not impact Average Annual Return (AAR) or Compounded Annual Growth Rate (CAGR) with a buy and hold position. - Greatly impacts CAGR if distribution phases has begun. Incorporating Home Equity as an alternative funding source during bear markets can dramatically
improve the odds of a successful long-term distribution plan. Finance of America Reverse | Slide 21 Sequence of Returns Risk (Cont.) Buy and Hold: Year Actual S&P 500 Returns Reversed S&P 500 Returns 2008
LOC Balance Net Value CAGR Finance of America Reverse | Slide 23 Manage Tax Liabilities Situation: Patti inherited a $150,000 portfolio from her mother in 1996. By 2016 the portfolio value is $497,697. She has always taken dividends from the account, but now needs to supplement her income by $1500 per month. She is 68 years old and owns a home valued at $525,000.
Finance of America Reverse | Slide 24 Tax Liabilities (Cont.) Solution: She is eligible for $292,307 in HECM proceeds. She is going to take tax free HECM Tenure payments of $1658 per month. When she passes her children will inherit the portfolio at a date of death valuation with no current tax liabilities. Finance of America Reverse | Slide 25 Increase Household Cash Flow Supplement Investment portfolio income
to keep withdrawal rates at levels that historically insure portfolio longevity. - 4% is historical safe rate, client needs 6%. - Draw extra 2% from HECM to preserve portfolio Payoff existing mortgage to increase monthly cash flow. - If still working, make monthly HECM payments to grow line of credit for future use. Finance of America Reverse | Slide 26 Payoff Home Example 62 year old Couple, $400,000 home, $80,000 loan balance. Refi to a HECM. Initial Loan Rate
Make no payments, save $10004.95% Make $1000 per month per month. LOC in year 20 is $348,283 EOY: Loan Balance EOY: Available LoC payments for 8 years. LOC in year 20 is $560,932 EOY: Hme Value EOY: Loan Balance $800,000
$1 $2 $3 $4 $5 $6 $7 $8 $9 $10$11$12$13$14$15$16$17$18$19$20 EOY: Available LoC EOY: Hme Value $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10$11$12$13$14$15$16$17$18$19$20 Finance of America Reverse | Slide 27 Diversify Real Estate Situation: In 2010, Andy and Peg, both 70 years old, wanted to purchase a $175,000 vacation condo in Florida. They owned a $650,000 home in Connecticut
eligible for $360,288 in HECM proceeds. Solution: Withdrew from HECM to pay cash for the condo. As of YE 2016, the Florida condo has appreciated 55.9%. Connecticut home has depreciated 2.9%. Finance of America Reverse | Slide 28 Fund Education Situation: Charlotte is an 82 year old widow who wants to help fund her 2 youngest granddaughters college education. She has a modest $300,000 portfolio. Enough social security and pension income, and has a Long Term Care Insurance policy. Owns her home worth $186,000.
Finance of America Reverse | Slide 29 Fund Education (Cont.) Solution: Charlotte is eligible for $125,364 in HECM proceeds or $913 per month in tenure payments. The granddaughters have a total monthly student loan expense of $2100 for 10 years. Charlotte has decided to send her tenure checks directly to the loan servicers, and nearly pay for half their monthly student loan bills. Finance of America Reverse | Slide 30 Fund LTC Protection
Situation: Chris and Joanne, age 62, owned a home worth $425,000 and have no Long Term Care protection: Their portfolio, projected pensions, and social security would take care of their retirement funding needs, unless there was a long term care issue. Long Term Care Policy premiums are $6200 per year. Would be a prohibitive on-going expense with regards to household cash flow. Finance of America Reverse | Slide 31 LTC Funding (Cont.) Solution: Eligible for $225,250 in HECM proceeds.
Decide to take $500 per month in tenure payments to pay for LTC policy and have $133,532 available in a growing Line of Credit. Offers protection against rate class premium increases. HECM will fund the protection they need with no effect on household cash flow. Finance of America Reverse | Slide 32 Fund Charitable Contributions Situation: Thelma is 78 years old, owns her home worth $300,000, and has volunteered at her local hospital for 37 years. Has long term care insurance, a modest portfolio but more than enough income from
her pension, IRA and social security to live a comfortable life style She would like to make donations to the hospital while she is still alive and can see the benefits. Finance of America Reverse | Slide 33 Fund Charitable Contributions (Cont.) Solution: Thelma has her IRA trustee send $20,000 per year directly to the hospital as a Qualified Charitable Deduction (QCD). She will save $4200 per year in income taxes Will draw an equivalent after-tax amount of $15,800 per year from her HECM Line of Credit. If interest rates remain the same, she can do
this for 16 years. Finance of America Reverse | Slide 34 Purchase a New Home 1 in 3 Boomers say they want to move. Want to equal or better their current lifestyle. Does not necessarily mean less expensive.
Looking for community based life style including planned developments and urban centers. The HECM Purchase program uses the same calculations as the regular HECM refinance program. Libor options also allow the homeowner to pay down the outstanding balance and build a line of credit for future use if desired. Finance of America Reverse | Slide 35 Purchase a New Home EX: Situation: Jim and Sandy are 68 and looking to purchase a
$600,000 home in a Florida golfing community. They will net $460,000 from the sale of their current home. If they pay cash for the new house they will need to bring $140,000 additional funds to the closing table. Finance of America Reverse | Slide 36 Purchase a New Home Ex: (Cont.) Solution: Cash Transaction Sale of previous home $460,000 Purchase price new home $600,000
$140,000 Cash Needed from other assets. HECM Purchase Sale of previous home $460,000 Purchase price new home $600,000 $337,200 available from HECM. $197,200 leftover cash available . Finance of America Reverse | Slide 37 This is Todays HECM!
Solutions For: Managing Sequence of Returns Fixed Income Planning Managing Tax Liabilities Social Security Planning Supplementing Household Income Diversifying Real Estate Funding Education Funding Long Term Care
Funding Charitable Contributions Purchasing a New Home Finance of America Reverse | Slide 38 Other Details Finance of America Reverse | Slide 39 1st Year Restrictions Greater of Mandatory Obligations plus 10% of Principal Limit, or 60% of Principal Limit. Ex: $333,343 PL
$200,005 = 60% of PL Avail 1st Year OR $235,000 = MO Example $ 33,343 = 10% of PL $ 268,343 Avail 1st Year Finance of America Reverse | Slide 40 Life Expectancy Set Aside Lenders can create Lifetime Expectancy set-asides at closing that are payable ONLY toward taxes, assessments, and insurance (hazard and flood). Can be required due to insufficient qualifying profile, or optional at borrowers request.
Finance of America Reverse | Slide 41 The Costs Mortgage Insurance Premium: 2.5% MCA if first year distributions are greater than 60% of available funds 0.5% MCA if first year distributions are less than 60% of available funds 1.25%of the outstanding balance annually
A possible origination fee Traditional third-party closing costs Finance of America Reverse | Slide 42 Consumer Protections Mandatory FHA Counseling session required for borrowers, non-borrowing spouses, and POAs. Screens for competency and comprehension of the loan program. Financial Assessment determines if borrower has financial capacity to pay taxes and insurance, and ongoing maintenance of the property. Non-Borrowing spouse rules make it possible for a spouse to remain in the home
even if the borrower dies. Finance of America Reverse | Slide 43 What Happens When Loan is Due? 3 Options: Repay the loan and keep the house. Family will not need to pay more than 95% of the appraised value. Sell and repay loan balance, keep remaining equity. If the loan value exceeds home value, deed home to servicer and walk away. FHA Insurance covers the lender for any losses. Heirs have 6 months to satisfy the loan, and up to two 90 day extensions, granted by HUD, provided they are actively pursuing satisfaction of the loan.
Finance of America Reverse | Slide 44 Final Thoughts Finance of America Reverse | Slide 45 Maybe Well Do This In a Few Years Delaying Could be Problematic: FHA has changed the PLF Factors 3 times, and the insurance rates twice in the past 10 years. When interest rates rise, Principal Limit Factors decrease resulting in lower available funds at loan closing. If borrowers residual income or credit declines, they may no longer qualify for a HECM.
Finance of America Reverse | Slide 46 What Financial Advisors Can / Cannot Do Can Cannot Do Identify a need. Discuss an overview of the program. Refer them to a HECM specialist. Include family members in your
conversations. Request compensation Invest the loan proceeds. Require your client to get a reverse mortgage. Finance of America Reverse | Slide 47 Presenter: Steve Resch, VP Retirement Strategies Finance of America Reverse 860-0760-9812; [email protected]areverse.com [email protected] Your Host: David Cook, Reverse Mortgage Consultant
Finance of America Reverse 631-393-1533; [email protected] This presentation was created by Finance of America Reverse, LLC FAR Learning and Development Finance of America Reverse | Slide 48
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