Reverse Mortgages in Retirement Income Planning

Transcription

1 Reverse Mortgages in Retirement Income Planning John Salter, PhD, CFP, AIFA Associate Professor of Personal Financial Planning, Texas Tech University Wealth Manager, Partner, Evensky & Katz/Foldes Financial Wealth Management 1

2 Tom Dickson, Financial Advisor Channel Leader for RMF Cell: (412)

3 Large part of baby boomer s net worth. Asset that is largely unused in traditional retirement income planning. Asset that may not be able to be ignored in the future. 3

4 Way to convert home equity to a useable resource a mortgage in reverse. Lender provides benefit based on home equity, payback is optional. Home Equity Conversion Mortgage (HECM) - Insured by FHA 4

5 One borrower should be age 62 or older. Pay taxes and insurance. Maintain home. Current mortgage must be paid off or refinanced into HECM. 5

6 Must be primary home and currently lived in, can be out 365 consecutive days. Single family property, HUD-approved condo, or up to 4-unit home. Borrower must complete counseling prior to closing. 6

7 Prior, there was no credit or asset check. Nearly 10% of reverse mortgages were in tax and insurance default. Most likely will be more formal credit check and test for assets related to paying taxes and insurance. No longer a last resort? 7

8 Tenure- equal monthly payments for life as long as in home Term- equal monthly payments for a fixed period of time Line of Credit- unscheduled payments or in installments Combo of the above! 8

9 The amount of home equity available based on certain factors up to the home value limit $625,500. Think loan to value ratio, but home value in ratio capped at limit. 9

10 Calculated using following factors Age of the youngest borrower Older yields higher benefit Lender Margin Higher margin, decreased initial PLF Interest rates Lower expected rates (expected) yields higher benefit Currently based on 10-year LIBOR swap rate 10

11 Mortgage closing costs Title insurance, appraisal, attorney fees, etc, etc Mortgage Insurance Premium (FHA) = 0.5% Exception if > 60% PLF is used in first year, then 2.5% Origination fee Shop around Some lenders flat rate, some decrease origination with increased margin. 11

12 Combination of FHA Mortgage Insurance Premium = 1.25% Lender Margin = currently 2.25 to 4% LIBOR rate = variable, currently 0.2%, geometric average = 2.8% OR fixed rate Today, would equal ~ % 12

13 No monthly principal or interest payment required Proceeds are tax-free Interest deductible when paid (and itemizing), interest payback is front loaded (Please consult a tax advisor) Benefit type can be changed for $20 13

14 HECM (FHA insured) is non-recourse, the borrower or their estate will never owe more than the value of the home upon sale or death. The loan can not be called/cancelled as long as requirements are met. Unused line of credit grows over time. Can refinance if terms become better (upfront fees apply just as refinancing a traditional mortgage) 14

15 HELOC Reverse Mortgage Line growth? No Yes Cancelable? Yes No Requires repayment? Yes No Age restriction? None 62 15

16 They aren t free Misuse or ill advised use bad press Stigma of using the home value; debt Misconceptions I ll lose my home, bank owns home Mobility risk 16

17 Cost sensitivity. Misunderstanding the product. Compliance has been a big issue. A fiduciary duty? 17

18 Last resort reversed Manage sequence of return risk Refinance a mortgage/eliminate payments Replace a HELOC Purchase a Home Defer Social Security Create Income Alternative to Longevity Insurance? 18

19 Should a line of credit be taken out today and not used until later, or wait for portfolio to deplete then open a line of credit? Issues: Cost if not needed one didn t need to be set up. Age larger amount available when older. Interest rates very low today, uncertain tomorrow. 19

20 Years Now-Low Late-Low Late-Mid Late-High % 97.0% 94.5% 92.4% % 66.2% 63.1% 60.7% Answer? Take out a line of credit today and watch it grow! *Based on 5% real withdrawal rate. 20

21 Goal to avoid selling assets in bear markets Strategy standby reverse mortgage Investment Portfolio (Bucket) Refill when rebalancing, making changes or when CFR account is depleted, portfolio acceptable Cash Flow Reserve Account (Bucket) Borrow in bear market and cash depleted Payback when portfolio back to acceptable Retirement Living Expenses Standby RM (Bucket) 21

22 If portfolio above glidepath mark (80%) Refill cash when rebalancing, investment changes Cash bucket empty, refill from portfolio. LOC balance > $3,000 repay then refill. If portfolio below glidepath mark (80%) Have cash, need to rebalance, only rebalance Cash bucket empty, borrow from LOC 22

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25 Currently a popular reason for taking out a reverse mortgage. Current mortgage is refinanced into the reverse mortgage to stop payments for cashstrapped retirees, payments are not required. Loan builds over time and sale proceeds pay loan upon death or sale (or heirs pay to keep the house). 25

26 Based on earlier slide, simply replace a traditional HELOC. HECM LOC No payback required Credit line cannot be reduced, actually grows. Cannot be called or cancelled. 26

27 HECM for Purchase HECM proceeds can be used as a down payment. Payback optional over time. *Strategy has not yet been simulated in research. 27

28 HECM term payments can be used to fill in the gap of income in order to defer Social Security. Particularly useful for those not financially able to defer. *Strategy has not yet been simulated in research. 28

29 The Standby methodology was aimed at increasing the probability of clients meeting goals, For the same probability, can a client spend more? 29

30 Tenure payments provide an increased cash flow. Debt builds over time as payments are made. Can increase spending ability for underfunded retirees. 30

31 Sample Client: 62 years old, $250,000 home, $500,000 portfolio 31

32 Simulate longevity insurance (aka deferred SPIA, deferred income annuity). Initiate LOC today, convert to tenure payment later. Asset control is never given up to insurance company through premium. Risk of needing to leave the home. *Strategy has not yet been simulated in research. 32

33 Standby/Use Later example. Refinance example. Needed to use standby example. 33

34 Once I was educated, the ideas opened up! There is nothing wrong with the product, only past use and behavioral issues. Home equity can and will be an important part of the retirement income puzzle. 34

35 Questions? If you think of them later 35