Financial advisers have been reticent to recommend the use of reverse mortgages in the past. But times have changed with many financial planners now encouraging retirees to consider how best to use their equity as an element of financial planning.
Many things about the “new” HECM are substantially improved and the product deserves a renewed consideration by financial advisers in addressing certain issues and possible solutions for their customers. Financial adviser customers who are retired and are possibly running out of savings and other resources, or are unable to obtain economic or adequate Long Term Care insurance, or clients who support their parents but are “sandwiched” between the costs of college kids, looking after parents, and saving for their own retirement are all potential candidates for a HECM.
What’s Different about the “New” HECM?
- The protection issues surrounding Non-Borrowing Spouses has been addressed, affording these family members almost the same rights as are extended to spouses on title.
- Risk policies have been introduced that limit 1st 12 months disbursements.
- An income evaluation is now required to ensure the borrowers can actually afford the home and are not placing themselves in the path of a virtual foreclosure.
- And finally, family members now have the same opportunity as anyone else to purchase the home (if it is foreclosed upon by FHA for insufficient value to pay off the HECM) for 95% of the current value of the home.
Most importantly, these mortgages are not the “loan of last resort” anymore. Yes! There are people who only have their home as a retirement asset and need to liquefy it. But informed, reasonably well off retirees can use a HECM to buy a 2nd home, fund catastrophic health care costs, add a 4th leg to the income stool along with social security, pension and savings, use the optional repayment on a HECM to maximize cash flow, and even fund a tax efficient charitable gift that can be enjoyed and appreciated while the donor is still alive.
What’s Financially Unique about a HECM?
Aside from the protections described elsewhere in this website, HECMs have three critically unique features:
An unused HECM can get bigger. If you do not use a variable interest rate HECM’s line of credit, or you pay down the line of credit after you use it, that unused portion can grow annually at the mortgage rate of interest plus the rate of the annual mortgage insurance premium. The amounts available can exceed the original appraised value of the home and possibly (depending on the real estate market) exceed the then current market value of the home. There are a lot of things the borrower can use that growth for: hedge the value of their home, have a fund for long term care (if they went uninsured), or just simply to have the comfort of a backup line.
You can pay it back, just like a regular mortgage. You can make all the repayments you wish. But there is no requirement to make any mortgage payment. It’s the borrower option.
The income qualifications are modest. Given the low yields retirees are facing these days on their savings, this is a very advantageous feature if your clients seek a mortgage with all the protections the HECMs afford.
Why Should Financial Advisers Care about HECMs?
Because HECMs solve some very unique problems and also provide a broad range of subjects and strategies for you to talk with your customers about. Look at the following list of questions and perhaps you will sense what we mean:
How Many Clients Do You Have That Are Over 62, and “Brick Rich”that:
- Will have to sell or downsize to fund a longer retirement?
- Can’t afford their insurance and property taxes?
- Need Long Term Care Insurance, but can’t fund the premiums?
- Don’t qualify for Long Term Care Insurance (and almost 50% of people over 62 are unable to qualify) and have no emergency cash or savings to fund?
- Want to age-in-place, and want to move and buy their primary residence close to kids, or in elderly housing location, or maybe just in their dream location?
- Have a HELOC that is now amortizing and don’t have the necessary income to get new one or pay down the old one?
- How many are exceeding the normal annual 4% of asset dissipation and will run out of money far quicker than anticipated?
- How many have mortgage payments and would like the option to skip or defer as their income or needs dictate?
How many of these older clients, who are a little more sophisticated, can use a HECM to better advantage given their circumstances? For instance, do you have clients that:
- Need to redeem an annuity?
A HECM might be a far less expensive way to obtain liquidity and repay the HECM with the proceeds of the annuity.
- Have taxable income or other taxable redemptions they wish to reduce the tax rate on?
Such income can possibly be offset by accumulating HECM mortgage interest and paying it in the future, when the anticipated income arrives. (Though we always advise the borrower consult an independent tax adviser)
- Want to buy a 2nd home (not their primary residence)?
They can use the equity in their primary residence to get a HECM. This has the additional advantage that one home is FHA protected, while the other home is debt free.
- Want to upscale into an Elder Community?
Borrowers can use proceeds from sale of existing home as well as a new HECM to fund a new more feature rich home.
- Want to maximize social security by delaying using it as long as possible?
Borrowers can use the HECM to temporarily fund the shortfall and enjoy an annual 7% – 8% increase in benefits.
- Want to purchase an annuity but have no funds?
The annuitized payout of the FHA HECM’s Tenure option provides essentially the same monthly payments as certain annuities tax free.
- Want to hedge the value of their primary residence?
Many things impact the value of real estate. A HECM in the right circumstances, and for the appropriate age of the borrowers, may offer certain comfort that a minimum value is available. After all, if the home is worth more, then it can be sold regardless. The cost for this protection is minimal.
- Want to make a significant charitable contribution and enjoy that reward in their lifetime?
A HECM uses that same asset the borrower may always intend to be used to fund that contribution. But now they can do it in their lifetime. And instead of gifting the home in (say) exchange for a gift annuity, and assuming all the risks attendant with that strategy, they can stay in the home, possibly get a tax deduction regardless, and enjoy any property appreciation.
How many clients do you have that support their parents as well as their own college level kids (the “sandwiched” generation) and go into debt/can’t save to do it?
More and more children of elderly parents who support their parent and their own family’s day-to-day costs are being “sandwiched”. They can’t save and their parents can’t survive without their help. And if their parents have a major medical issue it can wipe them out. A thoughtful use of a HECM can lessen the burden, and the optional repayment can permit the children to fund their parent’s retirement when they have improved cash flow.
Overall, the HECM is now a useful solution to many financial problems. Yes, it can be expensive if heavily used within the first 12 months. But these costs reflect the risks associated with those borrowers. And with proper structuring these costs can be mitigated and reduced. Otherwise the HECM costs are comparable to other mortgages, and its features and protections are very unique and valuable. There are plenty of solid financial planning opportunities that can be funded with a HECM.
Would you like to learn more?
- Click here for eBrochures, eBooks, FAQs and Videos!
- If you would like to know how much you potentially qualify for, and whether you possibly have adequate monthly cash flow, go to the HECM WIZARD and input your information.
- If you would like to reach out and talk with me, fill out the information on Contact Me or email at st.john.bannon@JMCapGroup.com