FHA’s Home Equity Conversion Mortgage (HECM) UNDERSTANDING IT AS A CASH-FLOW MANAGEMENT TOOL FOR MATURE HOMEOWNERS
FHA’sHome Equity Conversion
Mortgage (HECM)
UNDERSTANDING IT AS A CASH-FLOW MANAGEMENT TOOL FOR MATURE
HOMEOWNERS
HECM DefinedA federally-guaranteed home loan with deferred repayment:
◦primary residence◦single-family residence◦HUD-approved condos◦1-4 unit buildings◦Co-ops, not yet….
HECM Defined
Insured by HUD◦ non-recourse◦ no personal liability
(only subject property is liable for accrued debt)
HECM Defined Repayment deferred until Triggering Event:Death of last remaining borrower or
eligible non-borrowing spouse (NBS)12 consecutive months of all residents
being out of the home Choose to sell, re-fi or transfer title Convert to rental property
Sequence of Returns &Reverse Dollar Cost Averaging
A Different Kind of Cash Flow Management Tool: Variable interest rate (lender’s margin + Annual
LIBOR) Revolving Line of Credit (LOC)
◦ LOC restores if borrower ever chooses to make a payment (always optional)
◦ Growth Rate of credit line is automatic and federally-guaranteed
◦ regardless of home value or outside factors available proceeds uncapped over life of loan
Draws are tax-free
HECM Defined Lump Sum◦ Fixed-interest rate◦ NOT a revolving LOC◦ Extinguish existing mortgage
and consumer debt to reduce draw rate from investment portfolio
Availability of funds Variable interest rate (lender’s margin + Annual LIBOR)
◦Revolving Line of Credit◦Tenure – lifetime payment to borrower based on age
◦Term – choose number of months or monthly amount
Flexibility of variable rate loan
Borrower can choose combo of any/all options at closing◦ LOC + lump sum + tenure
or term paymentBorrower can restructure at
any time and as needed
HECM vs. HELOC The HECM loan is vastly more flexible and offers protections not available in other types of lines of credit
◦ LOC cannot be arbitrarily frozen or reduced◦ Non-recourse◦ Never re-casts into a P&I payment◦ Zero monthly repayment ◦ Open ended term (lifetime residency)◦ Unlimited Draw period◦ Federally-regulated
What’s new?Lower IMIP for borrowers accessing <60% year one.Eligible non-borrowing spouse now protected for lifeDefault reduction plan instituted by HUD •Minimal financial and credit assessment done at
application• LESA (set-aside) created for borrowers with prop
tax / home owner’s insurance delinquency
What’s new?
Lifetime interest rate cap lowered from 10 to 5. Borrower has option for no set up fee loan Higher rate = faster increase in LOC funds
HUD’s formula 10-year LIBOR swap (used in Expected Rate)
and
Age of youngest borrower determines
Principal Limit Factor (Percentage of 625,500 or home value,
whichever is less)
No Longer a Last ResortMichael Kitces, recently spoke at NAPFA May 2015, “Taking a Fresh Look at Reverse Mortgages”Barry Sacks, “Reversing Conventional Wisdom”Salter and Evensky, “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distrbutions”Boston College Center for Retirement Research, “Using Your House for Income in Retirement”
Application Timing? When LIBOR increases, $$ available to Borrower decreases. Example: 73 year old5% Exp Rate = 58% Principal Limit Factor6% Exp Rate = 49% Principal Limit Factor8% Exp Rate = 37% Principal Limit Factor10% Exp Rate = 28% Principal Limit Factor
Case StudiesSequence of Returns in Draw Period – Line of CreditDrawing more than recommended – TenureHealth care – TermCombo (LOC/Term/Tenure)Extinguish mortgageDownsizeDivorce/inheritance – Settle the estateAvoid Capital Gains - Stay in home
Downsizing scenario Step One: Sell existing home 1,650,000 Pay off existing mortgage (541,000) (eliminate monthly mortgage payments) Sale fees estimated (95,000) Capital gains (100,000) (check with your tax advisor) Cash left over from sale $914,000 Step Two Downsizing to put cash to work and eliminate monthly mortgage payments for good: Cost of new home 700,000 HECM proceeds (350,000) +/- depending on age and interest rate at time of application Buyer pays 350,000 from cash on hand (out of 914,000 from sale of current home)
$$$ Cash left over after purchase, to save or invest $564,000 +/-
No Longer a Last Resort Based on current academic and scholarly research, advisors may have a fiduciary responsibility to evaluate -- for each client entering retirement -- the potential effectiveness of the FHA’s HECM to reduce the probability of untimely portfolio exhaustion.
All research posted on-line at:
www.FhaReverseBlog.com
Amanda Keith, CPA, nmls# 1247741 415.747.5668
900 Larkspur Landing Circle, Suite 240, Larkspur, CA 94939Fax 650.284.2599
Thank You!