Reverse Mortgage Guide

Transcription

1 Reverse Mortgage Guide I wrote this guide to help homeowners and their families understand Home Equity Conversion Mortgages (HECMs), also known as federally insured reverse mortgages. I have updated this guide over the past twelve years as the HECM program has evolved. I recommend that you share this guide with anyone who provides you with financial advice, because most financial professionals have never been educated about this program. Even if you won t need to take money from a HECM for a long time, some of the little-known facts in this guide may be useful for your financial planning, improving your chances of a successful retirement. Bruce McPherson, CRMP Certified Reverse Mortgage Professional

2 Introduction and Brief Summary Home Equity Conversion Mortgages (HECMs) are unique financial tools, regulated by the US Department of Housing and Urban Development (HUD) and provided by HUDapproved lenders to benefit homeowners aged 62 and older. A HECM can convert some of your home s value into federally-insured funds that you can borrow whenever you wish, without having to make monthly loan payments, and without giving up ownership or control of your home. No matter how much money you borrow (and as long as you follow the common-sense rules described later in this guide), repayment is never required until you have passed away or permanently vacated your home. One of the many myths about HECMs is that the home must be sold at the end, or the lender takes the home. But the truth is much better: Your family can choose to sell the home and keep the net proceeds from the sale. Or your family can choose to keep the home by paying back the loan balance. The loan balance is never a personal liability; it is only attached to the home. The HECM program offers three options for accessing HECM funds: You can receive federally insured Monthly Payments; you can receive an up-front Lump Sum; or you can choose to leave the money sitting in a growing Line of Credit to borrow from whenever you wish. Or you can choose any combination of these options. All of the money you receive from your HECM is tax-free, regardless of how you take it. (Mandatory disclaimer: I am not a tax professional; this is not intended to be tax advice.) HECMs are also called reverse mortgages, but HECMs are very different from the old reverse mortgages you may have heard about. HECMs are federally regulated and insured. And HECMs offer flexible options to fit your needs. Qualifying for a HECM is easier than qualifying for a traditional mortgage or line of credit, because you don t have to prove that you can afford monthly loan payments (since they are never required). HECMs were designed for homeowners who wish to improve their cash-flow, pay for home improvements or other needs, pay off a mortgage or other debts to eliminate monthly loan payments, or prepare for future needs by securing a guaranteed reserve fund (the HECM Line of Credit) that constantly grows for the homeowner every month, tax-free.

3 Not everyone who gets a HECM needs the money. Many people get the growing Line of Credit as part of a simple strategy to improve their long-term financial security. The strategy is explained later in this guide. If you choose the Line of Credit option or the Monthly Payments option, you can easily make changes in the future. For example, you can choose to convert some or all of your Line of Credit into guaranteed Monthly Payments at any time. No matter how much money you borrow from a HECM, you are never required to make monthly loan payments. Because of this feature, a HECM can significantly improve your financial independence. You will be less likely to need financial assistance from your family during your retirement. The trade-off for your family is that they will not inherit as much of your home s equity when you are gone. ( Equity equals your home s value minus the loan balance). If the loan balance when you pass away is higher than the home s value which could happen if you borrow a lot of money and live a long time then there won t be any equity left for your family to inherit. But they won t inherit a debt either, because the loan balance is never a personal liability. If you plan to stay in your home for the rest of your life, a HECM is much safer than a traditional mortgage, home equity loan, or home equity line of credit (HELOC). This is true for four reasons: As long as you follow the common sense rules explained later in this guide, HECM funds are guaranteed even if home values fall! HECMs never have prepayment penalties. Since monthly loan payments are never required, there is no such thing as facing foreclosure due to delinquency on monthly loan payments. (But you are still required to keep paying your property taxes and home-owners insurance bills). The loan balance is never a personal liability. It is only attached to the home. Reverse mortgages in the past were never this safe and flexible. So in 1983, Congress decided to create a reverse mortgage that was federally regulated and insured. The effort began in the Senate Committee on Aging, where Senator John Heinz proposed a program to truly unlock the value of home equity for the millions of older Americans who can appropriately benefit. Four years later, President Reagan signed the HECM program into law, authorizing the Federal Housing Administration (FHA) to insure HECMs. Today the HECM program is a proven example of how our citizens can benefit when Congress acts in a bipartisan manner to implement intelligent policies.

4 For the first two decades of the HECM program, only one type of HECM was available. But now there are different HECMs to choose from. This increase in choice, combined with the choices regarding how to make the funds available (lump sum, credit line, monthly payments, or any combination), make it possible for a Certified Reverse Mortgage Professional to provide the right HECM for you and design your HECM the best way to fit your needs. The better your HECM is designed for you, the more beneficial it will be for you over the long term. Although monthly loan payments are never required, HECM money is not free money. As with any type of mortgage, you will receive a monthly statement that shows you the current size of the loan balance. The loan balance is the total of four things: The amount of money you have borrowed so far The interest that has accrued so far The FHA s 1.25% Ongoing MIP (Mortgage Insurance Premium). The lender is required to pay this to the FHA and add the cost to the loan balance. The financed closing costs* The loan balance is not affected by funds that you haven t borrowed yet. For example, if you have $300,000 available in a HECM Line of Credit, but you have only borrowed $50,000 so far, the remaining $250,000 that you haven t borrowed yet has no effect on the interest or MIP that is being added to the loan balance. * Financed closing costs refers to the costs that are added to the loan balance at the closing. (The only other closing costs are the out-of-pocket costs, which are typically in the neighborhood of $450. They can be waived in some cases.) One of the financed closing costs is the FHA s Initial Mortgage Insurance Premium (IMIP). The FHA charges both MIPs (the Initial MIP and the 1.25% Ongoing MIP) because the FHA insures all HECMs. The insurance means that if the home is under water someday when you are gone, the lender relies on the FHA not your family to repay the difference between the home s value and the amount the lender is owed. The financed closing costs used to always be high, because HUD s IMIP used to always be high. But in 2013 HUD changed the way the IMIP is calculated. Now the IMIP is only a quarter of what it used to be except in cases where a large percentage of the HECM funds are borrowed up-front to pay off a large mortgage on the home. The total financed closing costs can vary a lot, depending on the type of HECM and the interest rate that you select. Currently it is possible for the closing costs to be incredibly

5 low, because lenders are currently willing to pay some of the costs if the homeowner selects an interest rate on the higher end of the range. The loan balance will come due after the last remaining HECM Borrower has sold the home or permanently vacated the home (i.e., passed away, established a new primary residence, or vacated the home for more than 12 consecutive months without coming back). The loan balance can also come due if you don t follow the common-sense rules that are explained later in this guide. You are allowed to pay down the loan balance if you wish, or pay it off completely, without any prepayment penalty. In other words, if you decide to make payments of any amount, any time or if you decide to sell your home, or if you refinance into a new HECM or other type of mortgage, there is no penalty. Assuming that you live in your home until you pass away, what happens next? An appraisal will be performed by an independent appraiser so that your heirs will know the value of the home. If there is equity remaining in the home, your heirs may decide to keep the home by paying back the loan balance (this is typically done by refinancing i.e., replacing the HECM with a new mortgage). Or your heirs may prefer to sell the home and keep the remaining money from the sale after the loan balance is repaid. Federal regulations provide your heirs with a reasonable amount of time to do this up to 12 months as long as they are acting in good faith to either refinance or sell the home. If the home s value at the end is less than the loan balance (i.e. the home is under water ) then your heirs still have options. Amazingly, they are allowed to keep the home by paying back just 95% of the home s appraised value instead of paying back the entire loan balance. HUD erases the remaining debt. Or your heirs can deed the home to HUD. Or they can do nothing, in which case HUD will require the lender to foreclose. In all cases the debt is erased. None of this has any effect on your heirs credit scores. In fact, a HECM has no effect on your credit scores either, because unlike a regular mortgage, a HECM is never a personal liability.

6 The HECM For Home Purchase: If your goal is to buy a new home instead of accessing the equity in your current home, one way to do it is to utilize a HECM for Home Purchase (also known as a Purchase HECM or Purchase-Money HECM). This means qualifying for a HECM on the home you are buying instead of having to qualify for a traditional mortgage. When you utilize a Purchase HECM, your HECM funds are paid in a lump sum directly to the seller at the close of escrow just like with a traditional mortgage. But the big difference is that you will never be required to make monthly loan payments for as long as you live in your new home. The Purchase HECM is ideal for people who want to purchase the best home for their retirement needs without hurting their monthly cash-flow by taking on a monthly payment obligation, and without the huge expense of paying all cash. A substantial down payment is necessary, since a HECM does not provide as much money as a traditional mortgage does. But a HECM is safer than a traditional mortgage, since monthly loan payments are never required. And a HECM is easier to qualify for. If you or someone you know is interested in a Purchase HECM, I can provide them with a separate guide that explains the program in detail.

7 Important Rules for All HECMs: You must continue paying your property charges, i.e., your property taxes and homeowners insurance (and your HOA dues if you live in a condominium or similar community that requires them). If you fail to pay your property charges, such failure would put your property at risk, and therefore you would be asked to correct the issue. If you fail to correct it promptly, the loan balance can be called due. (This is the same rule that applies to traditional mortgages and home equity lines of credit.) The same thing could happen if you allowed the condition of your property to deteriorate below the minimum HUD guidelines and you were unwilling or unable to correct the problem. Although none of my clients have ever had their loan balance called due as a result of these rules, it is important to plan for the future so that you ll always be able to keep your house in decent repair and pay your property charges. This is true regardless of whether or not you get a HECM. The loan balance will come due if the last remaining homeowner has vacated the home for a whole year (i.e., 12 consecutive months). Because of this rule, it is wise to plan for when you are older and might need assistance with daily living. Elder care can be expensive. What if someday you need to move to a nursing home or an assisted-living facility for more than a year, and what if you had borrowed a lot of money from your HECM and lived a long time, and therefore there is little or no equity left when your family sells your home? Will your family have enough money to pay for your care? Or if you choose to remain and receive elder care at home, will you have enough HECM money or family support to help pay for it? These are important questions to consider. Ownership rule: Title to your home must remain in your name only. So if one of your children asks you to sign a deed that gives them partial ownership of your home (which is typically a bad idea for several reasons), just say No. The only way to add their name to title without breaking the HECM rules is to make them the Trustee of your Living Trust. (I recommend consulting with an attorney regarding these types of matters.) Bankruptcy Rule: In the unlikely event that someone who has a HECM decides to file for bankruptcy even though they have HECM money available to them, the government would require the lender to freeze the customer s access to their HECM line of credit and/or stop making monthly payments to the homeowner. But filing for bankruptcy does NOT cause the loan balance to come due, so it does NOT jeopardize your right to continue owning and living in your home.

8 Qualifying for a HECM Since monthly loan payments are never required with a HECM, it is easier for a retiree to qualify for a HECM than a regular mortgage, home equity loan, or Home Equity Line of Credit (HELOC). Here are the HECM Qualification Requirements: You must be age 62 or older. (In the case of a husband and wife, only one spouse is required to meet the qualifying age, but the under-age spouse could not access the HECM funds if the qualifying spouse permanently vacated the home; so therefore it is typically better to wait until both spouses are age 62.) Primary residence only. If there is a mortgage, home equity loan, or any other lien on your home, it must be paid off at the start of the HECM typically by using the HECM funds. (This happens automatically; you do not have to do it.) If you have a Home Equity Line of Credit (HELOC) on your home, it would need to be closed before your application for a HECM could receive final approval. You will not qualify if you obtained a home equity loan, HELOC, or cash-out refinance on your home during the previous 12 months and borrowed more than $500 from it. (HUD might change or relax this rule in the future.) Since HECMs are insured by the FHA (part of HUD), your home must be in decent condition. If the condition of your home does not meet the minimum FHA guidelines, repairs may be required. Some types of repairs must be done before the HECM can be approved, but most repairs can be put off until after your HECM is approved, as long as they are completed within the next six months. Since two FHA mortgages at the same time are not allowed, if you already have an FHA mortgage on another property you would be required to refinance it into a non-fha mortgage (or sell it) before you could be approved for a HECM. Although HECMs do not have the strict income and credit requirements that regular mortgages do, the government does require the lender to conduct a Financial Assessment to determine your willingness and ability to honor your basic responsibilities of homeownership (i.e., paying your property taxes and homeowners insurance on time, paying your HOA dues if you live in a condo or PUD, and keeping your house in decent repair). In order to conduct the Financial Assessment, the lender must review your income, assets, and credit history. If you fail the Financial Assessment, some of your HECM funds must be set aside to pay your property taxes etc. in future years. However, if there are not enough HECM funds available to set aside (due to a large mortgage on your home that needs to be paid off using the HECM funds), then your application for a HECM will be denied.

9 How Is My HECM Money Made Available to Me? If you choose a Fixed-rate HECM, the money will be paid to you as an up-front lump sum as soon as your HECM is funded. (Funding is the final step in the process of originating (creating) your HECM for you.) This is the ONLY option that a Fixed-Rate HECM provides. If you choose an Adjustable-rate HECM, you may choose any of the following options or any combination of the following options to make your money last longer by making it available in the way that best fits your long-term needs. You can also make changes in the future, in case your needs change. Option 1: Up-Front Lump Sum. A single payment made to you as soon as your HECM is funded. Option 2: Line Of Credit that grows for you. The HECM Line of Credit is similar to a credit card or a home equity line of credit, but with several unique advantages. The most obvious advantage is that you ll never have to make monthly loan payments. But there are additional advantages as well. 1.) Unlike a traditional credit line, the HECM Line of Credit is federally insured and it cannot be frozen, cancelled, or arbitrarily reduced as a result of falling home values, an economic depression, etc. 2.) Your available credit will grow for you every month, tax-free, based on your Credit Line Growth Rate. For example, let s say you have $300,000 available in your credit line, and you borrow $10,000, leaving $290,000 still available. When you receive your monthly statement the following month, you will see that the remaining $290,000 kept growing for you, so now there is a little bit more than $290,000 available. This is an amazing feature that the government built into the HECM program long ago. Surprisingly, this feature is almost never mentioned in articles about HECMs. 3.) Your available credit will continue to grow for you, even if home values are falling! 4.) Your Credit Line Growth Rate is a much higher rate than you could earn by withdrawing the money and putting it into a savings account or CD.

10 5.) If interest rates rise in the future, your available credit will grow for you at an even higher rate, because your Credit Line Growth Rate will rise and fall as interest rates rise and fall. This can provide you with excellent protection against inflation, since higher inflation typically leads to higher interest rates, which result in a higher Credit Line Growth Rate. Many forward-thinking homeowners decide to get the growing HECM Line of Credit as soon as they turn 62, even if they might not ever need to borrow from it. Why? Because they realize the benefit of having this compounding growth working for them right away. This is a smart way to prepare for unforeseen needs down the road. You can borrow from your Line of Credit as often as you wish. No transaction fees. Although monthly payments are never required, some people who have a HECM Line of Credit actually choose to make payments. In this way, they are treating their HECM Line of Credit the same as a traditional Home Equity Line of Credit (HELOC). When they pay down the loan balance, the money available in their credit-line immediately increases by the amount they paid. (This is called revolving credit.) But unlike a traditional creditline, the HECM credit-line is easier to qualify for. And monthly payments are never required. And this credit line can never be frozen, arbitrarily reduced, or taken away. And the un-used credit grows for you every month, even if home values fall. Option 3: Monthly Payments to you. This option consists of automatic payments of the same amount every month, electronically deposited into your bank account. The payments don t come from a Line of Credit. They come from the Monthly Payments plan. - Tenure Payments continue until the last remaining borrower has permanently vacated the home. This is true even if you live in the home for a very long time. - Term Payments last for a specific term that you choose. The shorter the term, the larger the payments you will receive. One of the myths about HECMs is that the loan balance will come due if you outlive your Term Payments. This is just a myth. The loan balance can never come due simply because you took all the money.

11 If you choose to receive monthly payments, but then in the future you decide you need a line of credit or a lump sum of cash, you can easily switch from the Monthly Payments plan to the Line of Credit plan and then withdraw the money you need. (If you choose a combination of Tenure Payments and a Line of Credit, the technical term for this is a Modified Tenure Plan. If you choose a combination of Term Payments and a Line of Credit, the technical term for this is a Modified Term Plan.) By using any combination of the above options, I can help you design the right plan to fit your needs. For example, some of my clients have chosen a combination of all three options, such as - A small lump-sum up-front to pay for something you need right away, such as home repairs, auto repairs, paying off credit cards, etc. - Monthly payments deposited automatically into your bank account every month, to help you live more comfortably. - A credit-line that keeps growing for you, so you ll be better prepared for unexpected healthcare costs or other expenses down the road. This is just an example. The best plan for you will depend on your own needs. How much money can I qualify for? How is it calculated? The amount you can qualify for will be calculated by computer formulas which HUD created and which every HECM lender is required to use. The calculations are based on several factors, including the home s appraised value; the amount of mortgage debt (if any) on the home; the date-of-birth of the youngest applicant, and the interest rate environment during the week that you sign your application. (Many articles published about HECMs mistakenly say that the amount of equity is a factor. It is not.) The first step in the calculation is a figure called the Claim Amount (It is also called the Max Claim Amount even though the word max is unnecessary). The Claim Amount equals the appraised value of the home, or the nation-wide Claim Amount Cap, whichever is lower. The government sets the cap each year. This year it is $625,500. [Example: John s home is worth $1.5 million and he applies for a HECM this year. The nation-wide Claim Amount Cap this year is $625,500. Since $625,500 is lower than $1.5 million, John s Claim Amount will be $625,500.]

12 A few years ago, Congress temporarily increased the Claim Amount Cap from $417,000 to $625,500. This temporary increase is scheduled to expire at the end of There is a good chance they will extend it for another year or longer. But they might let it expire and drop back to $417,000. (If this happens, it would not affect homeowners who already have a HECM. Whenever the government makes changes to the HECM program, the changes cannot affect HECMs that have already been created). Once the Claim Amount has been established, the next step is for the software to calculate the Initial Principal Limit, which is a percentage of the Claim Amount. A simple way to describe the Initial Principal Limit is: the initial credit limit, before subtracting the closing costs and the amount necessary to pay off any mortgage or other liens. [Example: Calvin and Cathy Carlson live in a home worth $1 million, so their Claim Amount is equal to the $625,500 Claim Amount Cap. Based on this Claim Amount, as well as other factors described below, their Initial Principal Limit is $423,000. But the Carlson s home is encumbered by a mortgage and a Home Equity Line of Credit (HELOC) with a combined debt of $470,000. And the HECM they are interested in has total closing costs of $5,000, so their total Mandatory Obligations are $475,000. ( Mandatory Obligations means the total amount required to pay the closing costs and pay off the mortgage debt). Unfortunately for the Carlsons, the $423,000 Principal Limit isn t enough to cover the $475,000 of Mandatory Obligations. Therefore a HECM isn t possible, unless the Carlsons want to cover the $52,000 shortfall out of their own savings (which might be worthwhile if their financial advisor is certain that the longterm benefits of eliminating their monthly payments are worth the $52,000 up-front.] As I mentioned earlier, the Initial Principal Limit is a percentage of the Claim Amount. The percentage used in the calculation is called the Principal Limit Factor, or PLF. Since the government insures all HECMs, the PLF is calculated by a government formula when your HECM is originated. There are two inputs into the PLF formula: The input that is most important is the Expected Average Interest Rate at the time that your HECM is created. This is an estimate of what the interest rate might be, on average, over the next ten years. (The name Expected Average Interest Rate is often shortened to Expected Rate ). If the Expected Rate is below 5.07% when you sign your application, you will qualify for the largest possible PLF. But if the Expected Rate is above 10%, nobody in the country will qualify for a HECM because the PLF formula will produce a value of zero. This is why the Expected Rate is so important. Maybe someday the government will change the formula to make it more generous. But don t count on it.

13 How is the Expected Average Interest Rate determined? If you choose a Fixed Rate HECM, the Expected Rate is equal to your fixed interest rate. If you choose an Adjustable Rate HECM, the Expected Rate is based on a long-term rate called the 10-year LIBOR Swap Rate. (The government does not control long-term rates such as the 10-year LIBOR; the government only controls the short-term Federal Funds rate, which has nothing to do with HECMs.) (Your actual interest rate is based on a different index than the 10-year LIBOR.) From 2008 to the present, Expected Rates have stayed in a tight range of 4% to 6%. Expected Rates are very low right now, because long-term interest rates are very low. But they cannot stay this low forever, so now is the best time to get answers to all of your questions and decide whether a HECM is right for you. If Expected Rates rise in any significant way before you apply for your HECM, then the percentage of your home s value that you can access is likely to be lower than it is today. There are different HECMs to choose from, and they don t all have the same Expected Rate. Therefore they don t all have the same exact PLF except during those rare periods of time when interest rates are so low that all HECMs have an Expected Rate below 5.07%. (Remember that if the Expected Rate is below 5.07% when you sign your application, you qualify for the largest possible PLF.) After your HECM is originated, rising interest rates cannot reduce your HECM funds, because the PLF calculation only happens at the beginning. Although the Expected Average Interest Rate is the most significant input into the PLF formula, it is only one of two inputs. The other input is the age of the youngest homeowner at the time that the HECM is originated. All else being equal, an older homeowner will benefit from a higher PLF than a younger homeowner who is getting a HECM at the same time with the same Expected Average Interest Rate. With Expected Rates currently below 5.07%, the PLF range is currently 52.4% (age 62) to 75% (age 90 or older). When Expected Rates are higher, the PLF range will be lower. Remember that the financed closing costs will be subtracted from the Principal Limit. And if you currently have a mortgage (or any other lien) on your home, funds will be subtracted from the Principal Limit and sent directly to your current lender to immediately pay off and retire your mortgage.

14 Detailed Example Andy and Alice Archer apply for a HECM. Their home appraises for $800,000. Claim Amount: The cap this year is $625,500, and the Claim Amount is always the lesser of the cap and the appraised value. In the Archer s case the lesser of the two is $625,500, so the Archer s Claim Amount is $625,500. Age: Alice is the younger of the two, so the Principal Limit will be based on her age. Alice will turn 75 within six months, so the Principal Limit will be based on an age of 75. Expected Average Interest Rate: The HECM that the Archers are interested in has an Expected Rate below 5.07% during the week that they sign their application, so they will benefit from the highest Principal Limit Factor that any 75 year old could qualify for. (If the Expected Rate was 5.07% or higher when they signed their application, the amount that they could qualify for would be lower. If it was 10% or higher, they wouldn t qualify for anything.) Based on Alice s age, and an Expected Rate below 5.07%, the Archers qualify for a PLF of 61.4%. The HECM software multiplies 61.4% by $625,500, producing a Principal Limit of $384,057. The total financed closing costs for the type of HECM the Archers selected are $10,000. The Archers home is encumbered with a HELOC (Home Equity Line of Credit), and the loan balance is $40,000. Adding this $40,000 payoff amount to the $10,000 closing costs produces total Mandatory Obligations of $50,000. Subtracting the $50,000 from the $384,057 Principal Limit leaves a Net Principal Limit of $334,057. If Andy & Alice selected an Adjustable-Rate HECM, they can choose to have a growing HECM Line of Credit that starts at $334,057. Or they could choose to receive Monthly Payments instead. Tenure Payments would be $2,176 per month. (The formula that converts the net principal limit into the monthly payment amount is too complex to describe in this guide.) Or they could choose to receive larger Term Payments instead of Tenure Payments. Or they could choose an Up-Front Lump Sum. They could also choose any combination of the Lump Sum, Line of Credit and Monthly Payment options. For example, if they choose Tenure payments of only $1,000 per month (instead of the $2,176 that they qualify for), then they can also have a $217,000 Line of Credit in addition to their Tenure Payments plan.

15 Limit on Total Amount Loaned Upfront or Within the First Year HECMs created after 2013 are subject to a new rule, called The 60% Rule. The amount that can be loaned up front or during the first year is capped at 60% of the Principal Limit. HUD allows one exception: If the amount necessary to pay the Mandatory Obligations (i.e., pay the closing costs and pay off any debt on the home) is more than half of the Principal Limit, then you are allowed to take up to an additional 10% of the Principal Limit upfront or within the first year if you want to. If these rules and formulas sound confusing, don t worry. All of this will be much easier to understand when I show you your HECM calculations in person. After the first year is over, you are allowed to access the full Principal Limit unless you selected a Fixed-rate HECM (because Fixed-rate HECMs only provide money up front). The reason for the 60% rule is to prevent abuses of the HECM program. Before the government created the 60% rule, a lot of greedy mortgage brokers were persuading homeowners to borrow all of the money up-front so that the broker would earn a much bigger commission. In fact, many of those brokers would only offer Fixed-rate HECMs, since those HECMs are up-front loans. Some of those brokers also profited by persuading the customer to buy an annuity or other financial product with all of that money. These abuses led to serious problems for a lot of older homeowners. Never let anyone persuade you to borrow more money up-front than you actually need. What if you need more money than a HECM can provide? If your home has a very high value, I can provide you with a jumbo reverse mortgage that provides a larger amount of money. But the jumbo reverse mortgage has a significantly higher interest rate than the HECM. And the jumbo doesn t offer all the options and guarantees that the HECM program offers, since the jumbo isn t federally insured.

16 A Brilliant Strategy for Portfolio Preservation There are many people who don t currently need money from a HECM, but they aren t quite wealthy enough to be certain they ll never outlive their retirement portfolios. To improve these people s chances of a successful retirement, a growing number of respected scholars in the Financial Planning field have recommended strategies that involve the HECM Line of Credit. I am available to meet with you and your financial advisor to explain the strategies. Here is a brief overview for now: Since the HECM Line of Credit is a federally-insured source of growing reserve funds, it makes sense for many people to get a HECM as soon as they turn 62 even if they have a million dollars in savings. Some of the reasons have to do with tax reduction strategies, which are beyond the scope of this guide. But the other reasons are simple: Reason #1: Since the HECM Credit Line cannot be frozen or arbitrarily reduced, it is a very dependable reserve fund. This makes it possible for your financial advisor to move some of your current reserve funds into more productive parts of your retirement portfolio, helping to improve your chances of a successful retirement. Reason #2: By securing a HECM credit line early in your retirement, and allowing it to grow for you month after month, you will be better prepared for someday when you might need the money. For example, when your investment portfolio suffers a downturn, your financial advisor might recommend that you live off of tax-free withdrawals from your HECM credit line instead of withdrawing from your portfolio at the worst time. This strategy allows your portfolio to recover more strongly when the market improves. After it does, your advisor might recommend using some of your gains to pay down the HECM loan balance, increasing your credit line at the same time. The research shows that HECM strategies including this one can significantly increase a retiree s Cash-Flow Survival Probability, compared to waiting and getting a HECM as a last resort after the portfolio has been spent. This is why my clients include retired Financial Advisors who already have significant investment portfolios. They saw the value of securing a HECM credit line early, to bring their Cash-Flow Survival Probability even closer to 100%. I can provide your financial advisor with the comprehensive research published in the Journal of Financial Planning which explain these strategies in detail. Mandatory disclaimer: I am not a Financial Advisor. This is not intended to be financial advice.

17 Effect on Public Benefits: A HECM has no effect on your eligibility for Social Security or Medicare. However, qualifying for needs-based benefits such as SSI or Medi-Cal can be different. For example, to qualify for Medi-Cal you have to prove that your assets are very low. A HECM is not an asset, but the money you borrow from your HECM and put into your bank account is an asset. So be careful not to take too much money from your HECM at any one time if you plan to qualify or if you currently qualify for a needs-based government benefits program. I recommend that you check with your local benefits program office for details. Advantages of the HECM Program: With a HECM, you are never required to make monthly loan payments. HECMs have NO prepayment penalties. So if you decide you want to make payments of any amount, any time or if you sell your home, or refinance there is NO penalty. Neither you nor your heirs are personally responsible for paying back the loan balance. As long as you obey the simple rules that I covered earlier, you will benefit from these additional advantages: You retain access to your HECM funds even if home values fall. The loan balance never becomes due prematurely, even if you file for bankruptcy, and no matter what happens to the economy, home values, or even the government. The loan balance only becomes due when the last remaining borrower transfers ownership of the home, moves away for more than a year, or passes away. All remaining equity will belong to you or your estate. If the loan balance when you pass away is more than 95% of the home s value, your heirs may keep the home by paying back 95% of the home s value instead of paying back the whole loan balance. In order for your heirs to receive this benefit, the home must be conveyed post-death i.e. given to your heirs after your death via your Will or Living Trust. In other words, they would NOT receive this benefit if you had already added them to your home s title before your death. The way the government wrote

18 this rule, it only works if your home is conveyed to your heirs within 90 days of your death. The best way to ensure that this happens is to avoid Probate by having an attorney create a Living Trust for you and then deed your home into your living trust. (A living trust is typically a good idea regardless of whether you get a HECM. I recommend consulting with an estate planning attorney to learn more about the benefits that a Living Trust can provide for your heirs.) Please feel free to call me with any questions. Over the past twelve years I have earned a reputation as a responsible HECM specialist who enjoys helping people make the right decisions. For this reason, most of my clients are referred to me by past clients or professional advisors in the local community. Letters of recommendation and client references are available upon request. I am certified to teach a Strategic HECM class for financial advisors and accountants, and a Purchase HECM class for realtors. Bruce McPherson, CRMP NMLS # Certified Reverse Mortgage Professional Office Toll-Free Cell This document is intended as a helpful guide. It is not a substitute for the official disclosure documents that you will receive when you apply for a HECM. If you have a financial advisor, attorney or accountant, I recommend that you give them a copy of this guide and ask them to call me with any questions. Copyright - Bruce McPherson