History, Facts and Uses of Reverse Mortgages For: Columbus FPA

Transcription

1 History, Facts and Uses of Reverse Mortgages For: Columbus FPA June 14, 2016 Tom Dickson Financial Advisor Channel Leader P: (412) E: For Copy of Slides & Research Visit: 1

2 Avoid Forced Sales in Down Markets Standby Reverse Mortgage to Improve Client Outcomes Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions John Salter, Ph.D, CFP, Shaun Pfeiffer, Harold Evensky CFP, AIF 2

3 August 13,2013 June 27, 2015 Jan. 21, 2016 Reverse Mortgage History 1961 First Reverse Mortgage 1983 Senator Heinz Proposal 1988 Law FHA Insurance and HECM Demonstration 1998 Program is Permanent 2001 HUD and AARP Partnership 2013 Program Safeguards 2014 Financial Assessment 3

4 Home Equity Conversion Mortgage (HECM) Mutual Mortgage Insurance Fund $105 Bn Insurance In Force the existence of negative equity does not require borrowers to pay off the loan and it does not limit the borrowers from receiving additional cash draws if allowed as per their HECM contract. Source: Actuarial Review of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2015 Note: Insurance in force is estimated as the total of the MCAs of the remaining loans in the insurance portfolio What is a HECM? Way for client 62 or Older to convert home equity to a useable resource a mortgage in reverse. Lender provides benefit based on Principal Limit Factor; concept similar to LTV ratio of traditional mortgage. Payback is optional. Lender DOES NOT own the Home 4

5 Number of clients 62+ at-risk? 0 or More? 1st HECM Use: Reduce Client Withdrawal Rates $125 low-cost HECM option: $1,829 per month tax-free cash. $1,000,000 $500,000 Total Monies Paid $438,960 $877,920 $625,500 Original Home Value Husband/Wife 62 Years-Old Husband Dies in Month 2 20 years 40 years 5

6 2 HECM Use: Manage Client Tax Brackets $ 53,333 IRA Withdrawal 13,333 Taxes* $ 40,000 Net $ 26,666 IRA Withdrawal 20,000 HECM Tax-Free** 6,666 Taxes on IRA $* $ 40,000 Net *Assumes 25% Marginal Tax Rate ** Consult your Tax Advisor 11 BIG News: Initial Costs Are Lower 6

7 HECM line of credit (LOC) growth 62-year-old client with $625,500 home in OH $125 Initial Cost (Not all states; Not All Lenders) $1,076,357 $593,059 $327,762 Credit Line Inception Year 10 Year 20 NOTEWORTHY: Line of credit is still in-force if one borrowing spouse must move to care facility, provided other spouse remains in the home. The line also remain inforce if one spouse predeceases the other, with same condition. 7

8 THE MATH FOR PREVIOUS SLIDE $625,500 Home Value X.524 Principal Limit Factor (PLF) $327,762 Available Principal PLF Factors Vary with (1) Client Age and (2) Expected Rates: Lender Margin + 10-Year LIBOR Swap Multiple Uses for HECM Credit Line Manage Sequence of Return Risk + Lower Cash Reserve Evensky, Salter, Pfeiffer Reserve for Long Term Care Costs Replace HELOC Deferred Income 8

9 Deferred Tax-Free Income $327,762 Available $27,470 Annual Payment ++ $593,960 ~$50,000 Annual Payment + $1,076,357 Credit Line Credit Line Age 62 Age 72 Age year-old client establishes HECM line of credit (LOC) At Age 72, client draws ~$27,470/year in tax-free cash and still has $593,960 or more available in credit line. At Age 82, client draws ~$50,000/year in tax-free cash and still has $1,076,357 or more available in credit line. Annual payments assumes 4.625% multiplied by then available credit line. Long Term Care Event with/without Protection SC Couple, both 62 years-old, with $1,500,000 portfolio, Social Security benefits, and $625,500 home (no mortgage) with NO LTCI. Husband requires assistance at age 85 at a cost of $75,000 per year for 3 years. Current Scenario: NO LTCI HECM Credit Line as Protection HECM Credit Line as Protection ++ Longevity Insurance Savings spent by 2040 $75,000 Credit Line Annual Draw for 3 Years Safety Margin: $785,523 $75,000 Credit Line Annual Draw through end of plan Safety Margin: $2,173,807 9

10 Credit Line Growth: How it Works $100,000 Available Line: X 5.5%* $5,500 Growth in Y1 $ 5,500 Growth + 100,000 $ 105,500 Available Line Y2 * Assumption: 5.5% = 3.25% Lender Margin + 1% LIBOR Index % FHA MIP Now or Wait? 10

11 Probability of Success for a 4% Post-Tax Initial Withdrawal Rate $1 million portfolio, $500,000 home value, 25% Marginal Tax Rate Probability of Success Ignore Home Equity Home Equity as Last Resort 40 Use Home Equity First Sacks & Sacks Coordination 30 Texas Tech Coordination Use Home Equity Last Use Tenure Payment Retirement Duration Source: Incorporating Home Equity into a Retirement Income Strategy by Wade D. Pfau Professor of Retirement Income at The American College Director of Retirement Research, McLean Asset Management Wade s Conclusions #1: Start the Line of Credit NOW Re: Probability of Success Highest #2: Legacy Values Higher When You Use Home Equity First Re: Preserve Investment Portfolio 11

12 Interest Rate Risk = Smaller Line Current Rates 1% Rate Rise 2% Rate Rise Principal Limit Factor 52.4% 39.5% 31.2% Credit Line (Day 1) $ 327,762 $ 247,073 $ 195,156 Credit Line (Y10) $ 593,960 $ 447,737 $ 353,656 Credit Line (Y20) $ 1,076,357 $ 811,376 $ 640,884 Assumes 62-year old with $625,500 Home Value and No mortgage debt. Principal Limit Factor used to calculate money available to clients is influenced by interest rates. That means clients will have access to less home equity in rising rate environment. Line-of-Credit Now or 10 Years from Now Start LOC at Age 62 Start LOC at Age 72 Difference Credit Line at Age 62 $ 327,762 NA Credit Line at Age 72 $ 593,960 $ 369,671 $ 224,290 Credit Line at Age 82 $ 1,076,357 $ 669,906 $ 406,451 Credit Line at Age 92 $ 1,950,541 $ 1,213,983 $ 736,558 Assumes $625,500 Home Value and No mortgage debt in comparison. 12

13 Initiating the reverse mortgage earlier and then coordinating spending from home equity throughout retirement offers a way to meet spending goals and provide a larger legacy. That is the ultimate goal of retirement-income planning: using assets to allow for more income and/or a larger legacy. Wade D. Pfau, Ph.D., CFA, Professor of Retirement Income, The American College Source: Advisor s Perspectives, December 1, 2015 How are clients 62 or older making mortgage payments? 13

14 Refinance Solutions May Be Available 1 Clients 62 or older with 2 mortgage payments And 50% in Home Equity May Refinance with HECM Eliminate Mortgage Payments + Cash Out VA Couple, 65 and 67 years-old, with $500,000 portfolio, Social Security benefits, and $600,000 home and $98,000 mortgage with $1,500 payment. Monthly living expense is $5,250 and life expectancy is 91 (husband)and 93 (wife). Projections below assume 7.5% annual return and 3% annual inflation rate. Current Scenario with $1,500/Mo. Mortgage Payment Eliminate Mortgage Payment with HECM + $1,500/Mo Cash Move and Buy New Home with HECM * Savings Lasts until 2028 Savings Lasts until 2043 Savings Lasts until 2043 *Assumes $300,000 from sale of current home is added to client s retirement plan. HECM Purchase is used to finance purchase of new home. 14

15 Best Financial Strategy for Rightsizing? Do you have clients 62 or older that are rightsizing? If so, have you quantified the best way for them to finance their move? Purchase $400,000 Home (NC) 67 year-old Rightsizing Opportunity Typical Scenario: Alternative with HECM Financing: $200,000 Cash* $200,000 IRA Withdrawal $191,000 Cash* $209,000 HECM Purchase Pros: No Loan Balance Cons: Reduce IRA and trigger taxes Pros: Preserve IRA and avoid taxes Cons: Loan Balance Results: Impact on taxes Impact on Client Cash: Reduce IRA OR Results: NO Tax Impact Impact on Client Cash: $0 *Cash is generated from sale of former home. 15

16 Final Thoughts Seriously consider the possibility of incorporating reverse mortgages in your planning toolkit. Harold Evensky The line of credit provides a way to create a more efficient retirement income strategy while also serving as a hedge, if the client s home value were to fall. It is essentially a put option on the value of the home. Wade D. Pfau Possible Candidates Do you have clients (62 or older) do you have with less than $1 MM in savings? Yes No Do you have clients (62 or older) with no long term care insurance? Do you have clients (62 or older) that are making mortgage payments? Do you have clients (62 or older) do you have that are purchasing a home? Total Probability 4 Yeses = 100% 3 Yeses = 75% 2 Yeses = 75% 1 Yes = 25% 16

17 For more information or a loan quote For a quote, all you need is: 1. D-O-B of youngest client 2. Estimated home value 3. Total debt on home (if any) 4. Property address Contacts: Tom Dickson, Planning Strategies P: (412) E: tdickson@reversefunding.com FHA-insured HECM Program One of clients on title must be 62 years old. Must be primary home and currently lived in. Available for single-family property, HUD-approved condo, or up to 4-unit home. (HECM for Purchase not available on multi-unit properties.) Proceeds can be used to purchase 2nd home or other property. Can be used to pay off first mortgage or HELOC.* A HECM cannot be called or canceled, as long as the terms of the loan are met. Clients downsizing can use a HECM to finance part of purchase. *Borrower is responsible for property taxes, homeowners insurance, and property maintenance. A HECM is home-secured debt payable upon default or a maturity event. 17

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