The Role of Reverse Mortgages in Financial Planning

Last time we talked about a presentation on the potential use of reverse mortgages in financial planning made by Dr. John Salter at the National Reverse Mortgage Lenders Association annual meeting in Boston.

As Dr. Salter explained, a financial plan can be described as involving an investment portfolio and a cash reserve fund (CFR). The CFR is the cash available to the investor for day to day expenses, and as it is constantly being used, is a fund that must be regularly replenished from the investment portfolio.

The problem is that when money is needed in the CFR, it may not be the best time to liquidate assets in the investment portfolio.

Enter the “Standby Reverse Mortgage.”

Simply stated, a reverse mortgage line of credit can be a standby source of cash for the CFR at such times when it is not advantageous to liquidate investments. The sneak peak presentation left the strong impression that using a standby reverse mortgage over a period of years can have a significant positive impact on net worth.

As we said last week, it looks like the mainstream use of reverse mortgages in financial planning is about to arrive!

John L Krajsa Jr, Esq., President, NMLS# 139056 is an attorney with a background in mortgage lending and estate planning. Mr. Krajsa has over 25 years of mortgage lending experience and has been working with FHA loans since 1996 and with FHA HECM reverse mortgage loans since 2002. Mr. Krajsa does not offer legal advice but will work with you and your advisors to help determine if a reverse mortgage is right for you. Find out more about AFC Reverse Mortgage and connect with John on Facebook.

The Future of Reverse Mortgages

We have long believed that as planners become more aware of the true cost of a reverse mortgage, and as planning uses of reverse mortgages are developed, the future of reverse mortgages may well be in the area of financial planning.

It looks like that day is about to arrive!

Those of us who attended the 2011 National Reverse Mortgage Association annual meeting in Boston the last week of October were given a sneak peek at a research study submitted to a journal to determine the fit of reverse mortgages in retirement distribution management. Those associated with the study include the renowned financial advisor Howard Evensky along with Dr John Salter of Texas Tech and Shaun Pfeiffer, a doctoral candidate at Texas Tech. The sneak peak was presented by Dr Salter.

More on the sneak peak next time.

John L Krajsa Jr, Esq., President, NMLS# 139056 is an attorney with a background in mortgage lending and estate planning. Mr. Krajsa has over 25 years of mortgage lending experience and has been working with FHA loans since 1996 and with FHA HECM reverse mortgage loans since 2002. Mr. Krajsa does not offer legal advice but will work with you and your advisors to help determine if a reverse mortgage is right for you. Find out more about AFC Reverse Mortgage and connect with John on Facebook.

Closing Costs in a Reverse Mortgage

By John Krajsa
AFC Reverse Mortgage

A lot has been said about high closing costs in a reverse mortgage due primarily to the up front initial FHA insurance premium. What is sometimes not pointed out is that, particularly with regard to adjustable rate reverse mortgages, interest rates are low due in large part to the FHA insurance, and low interest charges can offset those insurance premiums over time. It should also be noted that the new Saver program does not have an up-front initial FHA premium, so Saver closing costs are lower. Finally, reverse mortgage closing costs are financed as part of the loan and are not paid out of a homeowner’s savings. The typical reverse mortgage borrower is not required to bring money to closing.

Counseling Improvements

By John Krajsa
AFC Reverse Mortgage

A recent article in a national publication noted that a homeowner was not happy with reverse mortgage counseling obtained in 2006. What the article did not point out is that since 2010 the FHA Reverse Mortgage counseling program has been completely revamped. A new FHA protocol has been issued that requires a much more involved and lengthier counseling session than was previously required. Training and qualification standards for counselors have also improved. Counseling by an FHA approved reverse mortgage counselor is required before a lender can proceed with work on the loan and is a major consumer protection in the FHA program.

Financial Planning With Reverse Mortgages

By John Krajsa
AFC Reverse Mortgage

A recent article in Reverse Mortgage Daily suggests that new research soon to be released supports the use of the HECM Saver as a financial planning tool. The HECM Saver has substantially lower closing costs than the traditional program and so may be a suitable substitute for a home equity loan as a financial planning tool. We suspect that the fact that monthly mortgage payments are not required, but that there are no penalties if payments are made, is a feature that adds flexibility for planners that is not found in traditional home equity loans. Also, since there are no monthly mortgage payments, no proof of income is needed to qualify. Stay tuned.

Beating a Dead Horse

By John Krajsa
AFC Reverse Mortgage

My wife sometimes accuses me of beating a dead horse when I argue a point. A few weeks ago we addressed the issue of how waiting too long to use a reverse mortgage can end up costing someone their home. (See our entry from July 5).

At the risk of beating a dead horse, here is another example. For the last several years the homeowners were paying their bills through a combination of social security and other income while drawing down on their savings. Their monthly expenses included a $700 mortgage payment.

When their savings were nearly exhausted, they decided to look into a reverse mortgage. It turned out that the amount they would qualify for in a reverse mortgage was about $7000 less than they owed on their mortgage, and they did not have enough savings left (or access to gift money) to make up the difference, so the reverse mortgage would not be possible.

Had they looked into a reverse mortgage a couple of years ago, they very likely would have had enough savings to make up the $7000 difference. A reverse mortgage would have eliminated their monthly mortgage payment, saving them 12 x $700 or $8,400 per year. They would have had that $7000 difference back in mortgage payment savings in less than a year.

Eliminating monthly mortgage payments with a reverse mortgage is a great way for retired homeowners to preserve cash flow. Had these homeowners gotten a reverse mortgage five years ago, by now they would have saved over $40,000 in mortgage payments. If a homeowner intends to eliminate mortgage payments with a reverse mortgage, doesn’t it make sense to do it sooner rather than later?

Will a Reverse Mortgage Keep Me in My Home For Life ?

By John Krajsa
AFC Reverse Mortgage

None of us know if we can stay in our home for life. How long we will live, future costs and whether our future income will be sufficient cannot be known, regardless of whether we have a reverse mortgage. A reverse mortgage will always improve cash flow, either by eliminating a mortgage payment, or by providing additional cash, possibly both. If you continue to pay your real estate taxes and homeowner insurance and keep the home in reasonable shape, you can stay in your home as long as you choose. A reverse mortgage has no term or end date.

What Is the Money Used For?

By John Krajsa
AFC Reverse Mortgage

The Bethlehem borrower in the PBS Report on our web page said she was “feeling the pinch” of living on a fixed income. By far and away, most borrowers use a reverse mortgage as an additional source of retirement income. A reverse mortgage can replace a conventional mortgage or home equity loan and eliminate mortgage payments. Whether used as additional income or to eliminate mortgage payments, a reverse mortgage always improves cash flow.

Some take an initial advance to buy a car or to pay some bills. Others take an advance each year to pay real estate taxes and/or homeowner insurance. The National Council on Aging “Use Your Home to Stay at Home” program suggests using reverse mortgage proceeds for home modifications, ramps and other necessary expenses so you can stay in your home longer.

Financial advisors are finding reverse mortgages useful as part of a strategy to accomplish a financial objective and/or to save taxes. It is an “additional pot of cash” that will enable a homeowner to stay financially independent for a longer time than would have otherwise been possible.

Finally, new since 2009 is use of a HECM reverse mortgage for home purchase. Homeowners age 62 and over, including those with limited income, can now use a reverse mortgage to finance the purchase of a new home. For example, a couple living in a $300,000 home with a $100,000 mortgage can sell their home and use some of the proceeds as a down payment on a new home. A $150,000 down payment matched with a $150,000 reverse mortgage could result in a likely more accessible $300,000 new home and no more mortgage payments.

Generalizations Never Work

By John Krajsa
AFC Reverse Mortgage

In our last entry we pointed out that in today’s market reverse mortgages come in many shapes and sizes, and so it is difficult, if not impossible, to make a general statement that holds true for all. Many agree that not having to make monthly mortgage payments is a good thing. We know of two homeowners who took the words “last resort” literally and as a result are likely to have to move out of their homes. The facts in the two examples are similar; the numbers used here are to illustrate the case. Homeowners owe $160,000 on a traditional mortgage and would qualify for a reverse mortgage of $170,000 that could be used to pay off their conventional loan and eliminate their mortgage payments. They would also receive a check for $10,000, the amount remaining in the reverse mortgage proceeds after paying off their mortgage.

However, since the homeowners qualify for a home equity loan of $25,000, they decide to take that option. Two years later, they can no longer afford the payments on their conventional mortgage and home equity loan and decide to check out a reverse mortgage. They still qualify for a reverse mortgage of $170,000, but now owe $185,000. Since a reverse mortgage must be in first position and the reverse mortgage amount now leaves them $15,000 short of the funds needed to pay off their existing liens, a reverse mortgage is probably no longer possible. It would only work at this point if they have access to the $15,000 either in savings or as a gift from someone, or if they could convince the home equity loan lender to subordinate behind a reverse mortgage.

If none of those options are available and they cannot afford their mortgage payments, they will likely have to move out of their home. Had they gotten a reverse mortgage in the first instance instead of a home equity loan, they would have eliminated their mortgage payments, would have already saved two years worth of mortgage payments and would likely be able to remain in their home for some time to come. The moral of the story is that one size fits all general advice never works and homeowners who wait to use a reverse mortgage as a “last resort” may have waited too long.

Last Resort? Why?

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage is a type of loan that is distinguishable from other loans primarily by the fact that no monthly mortgage payments are required. There was a time when there was one FHA program with one set of interest rates and fees. But that was years ago. Today rates and fees vary. Some have closing costs that are higher than other loans. Some do not. Many FHA insured reverse mortgages are offered with interest rates, for example, that are below the prime rate. In today’s market monthly adjustable rates in the neighborhood of 2% are frequently available. Today many homeowners are shocked not by the high cost but by how reasonable the cost is in many reverse mortgage programs. So, since there is no “they” regarding reverse mortgages, it makes no sense to make a generalization as to when “they” should be used. In our view, when and where a reverse mortgage makes sense can only be determined on a case by case basis. Telling homeowners when to use a reverse mortgage without any knowledge of their personal situation is not only a bad idea, but can in fact be harmful. See our blog entry next week.