Presenting the FHA's HECM
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This document provides an overview of the Home Equity Conversion Mortgage (HECM) as a cash flow management tool for senior homeowners. Key points include: a HECM is a federally-insured reverse mortgage that provides tax-free funds to homeowners 62+ through a line of credit, lump sum payment, monthly payments or a combination; funds can be used for any purpose and are not repaid until the home is sold; and recent changes have expanded access and protections, making HECMs a viable option for enhancing portfolio longevity in retirement rather than a last resort. Case studies demonstrate how HECMs can be structured for different needs like healthcare costs or downsizing.
Presenting the FHA's HECM
- 1. FHA’s Home Equity Conversion Mortgage (HECM) UNDERSTANDING IT AS A CASH-FLOW MANAGEMENT TOOL FOR MATURE HOMEOWNERS
- 2. Your Presenters: Mary Jo and Amanda
- 3. HECM Defined A federally-guaranteed home loan with deferred repayment: ◦ primary residence ◦ single-family residence ◦ HUD-approved condos ◦ 1-4 unit buildings ◦ Co-ops, not yet….
- 4. HECM Defined Insured by HUD ◦ non-recourse ◦ no personal liability (only subject property is liable for accrued debt)
- 5. HECM Defined Primary residence Borrower must be 62+ Loan amount is lower if NBS is younger
- 6. 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
- 7. 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
- 8. HECM Defined Lump Sum ◦ Fixed-interest rate ◦ NOT a revolving LOC ◦ Extinguish existing mortgage and consumer debt to reduce draw rate from investment portfolio
- 9. 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
- 10. Flexibility of variable rate loan Borrower can choose combo of any/all options at closing ◦ LOC + lump sum + tenure or term payment Borrower can restructure at any time and as needed
- 11. Amortization of 72 year old: $50K Lump Sum, $50K LOC, Tenure payments $1,642/month
- 12. 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
- 13. What’s new? Lower IMIP for borrowers accessing <60% year one. Eligible non-borrowing spouse now protected for life Default 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
- 14. 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
- 15. 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)
- 16. No Longer a Last Resort Michael 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”
- 17. Application Timing? When LIBOR increases, $$ available to Borrower decreases. Example: 73 year old 5% Exp Rate = 58% Principal Limit Factor 6% Exp Rate = 49% Principal Limit Factor 8% Exp Rate = 37% Principal Limit Factor 10% Exp Rate = 28% Principal Limit Factor
- 18. Case Studies Sequence of Returns in Draw Period – Line of Credit Drawing more than recommended – Tenure Health care – Term Combo (LOC/Term/Tenure) Extinguish mortgage Downsize Divorce/inheritance – Settle the estate Avoid Capital Gains - Stay in home
- 19. 62 year old, Line of Credit
- 23. What else? Downsizing: ◦Eliminate existing mortgage payments and ◦Beef up Investment Portfolio
- 24. Downsizing scenario Step One: Sell existing home 1,650,000 Pay off existing mortgage (541,000) (eliminate monthly mortgage payments) Sale fees estimated (95,000) Capital gains (100,000) (check with your tax advisor) Cash left over from sale $914,000 Step Two Downsizing to put cash to work and eliminate monthly mortgage payments for good: Cost of new home 700,000 HECM proceeds (350,000) +/- depending on age and interest rate at time of application Buyer pays 350,000 from cash on hand (out of 914,000 from sale of current home) $$$ Cash left over after purchase, to save or invest $564,000 +/-
- 25. 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.
- 26. Enhance Portfolio Longevity Protect Against Unfavorable Sequence of Returns in Retirement with a HECM LOC (Home Equity Conversion Mortgage) Line of Credit
- 27. All research posted on-line at: www.FhaReverseBlog.com Mary Jo Lafaye, nmls# 246222 415.259.4979 info@MaryJoLafaye.com Thank You!