Reverse Mortgages (HECM) Helping Seniors

Transcription

1 Reverse Mortgages (HECM) Helping Seniors

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3 What is a Reverse Mortgage? A reverse mortgage is a non-recourse loan that allows homeowners to access a portion of their home equity. (Traditional refinance) or create an equity reserve via down payment. (Purchase). Also know as a HECM, which is an acronym for Home Equity Conversion Mortgage. Equity can be accessed as either cash, term or tenure payments, a line of credit option, or any combination of these.

4 Initial Eligibility Requirements To be eligible, all borrowers must: be age 62 or older. live in the home as their primary residence. participate in a government approved counseling session. have the ability to pay property taxes, insurance and any maintenance charges. All HECM borrowers will retain title to their property.

5 HECM Product Options FHA Insured Programs: National Lending Limit $625,500 Fixed Rate Monthly Adjustable (10 point cap) Annual Adjustable (5 point cap) Proprietary Program: Urban s HomeSafe Jumbo Program Fixed Rate Only Maximum Loan Amount $2,250,000

6 How Much Can You Receive? Principal Limit Factor (PLF) is based on 3 components: Age of the youngest borrower (or non-borrowing spouse if under age 62). The Max Claim Amount (MCA) which is the lesser of the lending limit or appraised value of the property. Fixed Rate or Libor Expected Rate (10 year swap plus margin) for selected product with 5.06% or less calculating the maximum available funds for FHA products.

7 How Much Can You Receive Example* Property Value $300,000 Age Age Age Available Funds $157,200 $186,600 $225,000 PL Factor 52.4% 62.2% 75% * Fixed rate or ARM Expected Rate of 5.06% or less.

8 What Are The Costs? Traditional 3 rd party closing costs Possible Origination Fee No underwriting or processing fees MIP: 2.50% of the MCA if 1 st year distributions exceed 60% of available funds.50% of MCA if 1 st year distributions are less than 60% of available funds 1.25% annual of the outstanding balance

9 What About Repayment? There are no principal, interest or mortgage insurance payments required for as long as at least one borrower still lives in the home as their primary residence. Once the last borrower either passes away or permanently moves, the loan will be due and payable. Non-borrowing spouses can live in property if they were married at application and it is their primary residence. Due to the non-recourse feature, the borrowers or their heirs will never owe more than value of the house, regardless of the outstanding loan balance Should the loan balance exceed the value of the property, family members may purchase it for 95% of the appraised value.

10 HECM Loan Options / Payout for Refinances Fixed Rate Products: Single lump sum distribution only - cannot exceed the greater of Mandatory Obligations (Payoffs and closing costs) plus 10%, or 60% of available funds. Most appropriate use is for large payoffs to eliminate monthly payments. Libor Products: Distributions can be in cash, term or tenure payments, line of credit, or any combination of these. Distribution method can be changed at any time. Partial repayments are available for future draws at a later date. Most appropriate product for strategic planning purposes.

11 Understanding the HECM LOC Option When compared with a traditional line of credit: HECM LOC s have no payment requirements. Traditional Lines of Credit require at least interest payments. HECM LOC s have no term limits as long as residency and maintenance requirements are met. Traditional Lines of Credit have term limits, generally 10 or 15 years. Then they amortize or have balloon payments. HECM LOC s cannot be cancelled, again as long as residency and maintenance requirements are met, regardless of what happens to the value of the collateral. Traditional Lines of Credit can be cancelled ( Ex: post 2008).

12 The HECM LOC Growth Rate The HECM LOC has a growth rate, unlike traditional lines of credit, which is equal to the Libor Index, plus the Product Margin, plus 1.25%. It compounds monthly on the available LOC. EX: Property Value $350,000, Age 62, Initial HECM LOC $183,400. * Rate as of 5/15/2015 with Libor Margin 250.

13 Understanding the HECM LOC (cont.) Payments can be made on the outstanding balance if desired. Payments INCREASE the available credit line dollar-for-dollar. Funds can be withdrawn again at a later date. The payment flexibility, permanency, and Growth Rate features makes the HECM LOC a key component in the Strategic Use of Home Equity for Wealth Management.

14 How Can The Strategic Use of Home Equity With A Reverse Mortgage Help Enhance and Manage Wealth?? 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, Standby Reverse Mortgages: A Risk Management Tool For Retirement, Journal of Financial Planning, 2012.

15 Strategic Use Diversify Real Estate Holdings Using a HECM to Purchase a Second Home: 70 year old wants to purchase $350,000 vacation condo in Florida. Owns a $650,000 home in Connecticut eligible for $360,288 in HECM proceeds. Draws $216,172 from HECM proceeds in year 1 for condo down payment (cash withdrawals restricted to 60% in year 1) Withdraws balance of $144,116 in year 2 to pay off condo. Owns 2 homes now with no payments other than Taxes, Insurance and Maintenance, and has diversified his real estate holdings to help hedge against different regional appreciation rates.

16 Strategic Use Hedge Against Declining Real Estate Values In 2006, a 62 year old in Las Vegas owns a home worth $400,000, and secures a $235,000 HECM LOC. HECM LOC had increased in value to $281,720. By 2011 the home was only worth $262,000. Since 1987, residential Real Estate has appreciated 3.4% on average but certain regions have experienced much higher or lower rates. HECM LOC s have guaranteed growth rates regardless of what is happening to the value of the property which can insure against stagnant or declining values.

17 The HECM For Purchase HECM for purchase is a program that allows older borrower to purchase a new principal residence AND obtain a Reverse Mortgage in a single transaction. As with a traditional Reverse Mortgage, all borrowers must be 62 or older to qualify. Older borrowers can use a Reverse Mortgage to purchase a new principal residence and downsize from their current residence, or relocate to other areas due to family, economics or any other reason.

18 HECM For Purchase Special Considerations It is important to remember the following details about a HECM for Purchase: There can be absolutely NO Seller Concessions There can be absolutely NO Lender Credits Borrower MUST choose Title Company and pay for Owner s Title; Seller can still pay Doc Stamps on Deed. Sales contracts should be for 60 days New construction must have a CO issued Be careful with REO properties. All repairs must be done.

19 $400,000 Cash Customer But what if that is too much house for them at their $715,000? That s a lot of house! You can sell them the same house AND a rental to buy what they want and give them more money each year. Purchase Price $400,000 Cash Needed $200,000 3% $12,000 PP on Rental $200,000 Cash Needed $200,000 3% $6,000 Rental Income@$1800 $21,600 Management $2,160 Annual Income for your Client $19,440

20 Line of Credit Example 66 Year old couple sells their home up north (or locally) and moves to South Florida, and you re their Realtor! Sold home for $300,000 Purchase Price of new home is $400,000 Cash needed for HECM Purchase = $219,600* Left over funds $80,400 ($300,000 sale minus $219,600 required) *Based on Age and 5.06% expected rate

21 Line of Credit Example (cont) What to do with that extra $80,400? Put it in the bank, earn 0.25% and pay taxes on the earnings? Or pay down HECM loan balance and establish a line of credit (HECM LOC) for $80,400. After 10 years, at current rates, the HECM LOC would be worth $119,089. If interest rate rose just 2%, after 10 years the HECM LOC would be worth $145,409. The HECM can be used a financial planning tool for the savvy HNW client; Not just a loan of last resort.

22 Closing / Questions? Brandon Crysler- NMLS# Producing Branch Manager Southern Home Loans a division of Goldwater Bank, NA Office: Cell: BC@SouthernHomeLoansFL.com