Can You Use A Reverse Mortgage To Purchase A New Home?

By Ryan Kleis

Article By: Wade Pfau: Professor at The American College and Principal at McLean Asset Management.

One option in the broader category of using reverse mortgages for debt coordination for housing is the HECM for Purchase program, which was started in 2009 as a way to use a reverse mortgage to purchase a new home. The government saw enough people using a more costly and complicated two-step process—first obtaining a traditional mortgage to purchase the home and then using a reverse mortgage to pay off that mortgage—and sought to simplify the process and costs.

With an example of a 62-year-old, a 5% expected rate, and a principal limit factor of 52.4%, the HECM for Purchase could cover this portion of the home’s cost. The other 47.6% would need to be financed from other assets, such as selling the previous primary residence.

The remaining payment cannot be made using other debt. To keep the initial mortgage insurance premium down, the borrower would only want to tap 60% of the principal limit—31.4% of the home’s value—and finance the other 68.6% through other resources. Those resources could be paid back after one year has passed, so the 47.6% number would effectively still apply then.

After that point, the new home is owned with a debt that does not need to be repaid until the borrower leaves the home. In terms of coordinating the use of debt for housing, not having to make a monthly mortgage payment reduces the household’s fixed costs and provides potential relief for the need to spend down investments.

Should the borrower live in the home long enough, the loan balance will likely grow to exceed the value of the home (more on this later). At that point, the heirs could hand over the keys and be done with the matter. In this type of situation, one could interpret the HECM for Purchase program as a way to provide housing services as long as the borrower stays in the home for an upfront cost of 47.6% of the home’s value. Should the borrower leave the home while the loan balance is still less than the home value, the home could be sold with any remaining equity still available to the borrower after the loan is repaid.

The HECM for Purchase program could be used to either downsize or upsize a retirement home. For those downsizing, the HECM for Purchase would free up more assets from the sale of the previous home to be invested for future use.

For those upsizing who have the financial resources to manage this sustainably, the HECM for Purchase could allow for a more expensive home—especially considering that obtaining a traditional mortgage may become increasingly difficult after retirement. Suppose the retiree wants to move from a $300,000 home to a $600,000 home. If the PLF is over 50%, the proceeds from selling the previous home and the $300,000 credit available with the HECM for Purchase would cover the full price of the new home.

Of course, the borrower may want to avoid the 2.5% initial mortgage insurance premium, but this is the basic process for upsizing without otherwise tapping into investments or taking out a new traditional mortgage.

Can You Use A Reverse Mortgage To Purchase A New Home?

The Reverse Mortgage has Won Some New Respect

By Ryan Kleis

Advisers now are promoting them as a valuable tool for retirement planning, thanks to recent safeguards

By ROBERT POWELL
Updated March 20, 2016 11:02 p.m. ET

The reverse mortgage has won some new respect.
A decade ago, most financial advisers would roll their eyes at the mention of reverse mortgages, loans that give homeowners an advance on their home equity and allow them to delay repayment until the home is sold. Such products, these advisers used to say, weren’t for their clients, but rather for those who didn’t prepare financially for retirement.

New safeguards in recent years, however, have led many advisers and researchers to change their minds about reverse mortgages. Indeed, many now are exploring when and how to use them in financial plans. One important change, the Reverse Mortgage Stabilization Act of 2013, prevents homeowners in most cases from taking all their equity at once—roughly 40% of the total amount that can be borrowed is unavailable until a year after the initial loan. Other recently enacted regulations require homeowners to demonstrate they are able and willing to pay their property taxes and home insurance. And there are new protections for the non-borrowing spouse.

Recent policy changes “should make the product safer for seniors in the future,” says Stephanie Moulton, an associate professor at Ohio State University and co-author of a 2015 paper on reverse mortgages published in the Journal of Urban Economics. Prof. Moulton estimates that such changes as limiting how much equity borrowers can extract upfront could cut the default rate on reverse mortgages in half. (In 2014, nearly 12% of reverse-mortgage borrowers in the federally insured Home Equity Conversion Mortgage program were in default on their property taxes or homeowners insurance.)

“Over time, these changes may encourage larger banks to re-enter the market, further increasing the credibility of the product and potentially lowering costs,” Prof. Moulton says.

Of course, there are still risks, including spending the proceeds too quickly and suffering losses if the proceeds are invested, as pointed out in a 2015 paper written by Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa., that favored the use of reverse mortgages in a retirement-income plan under the right circumstances.

While acknowledging the risks, Prof. Moulton says that “one of the advantages of the federally insured reverse mortgage, the HECM, is that the government assumes some of the risk for the borrower.” For example, she notes that HECM borrowers can never end up on the hook for negative equity. If the balance on the reverse mortgage ever grows to exceed the value of the home, the federal insurance covers the difference.

Here’s a look at some of the reverse-mortgage strategies financial planners suggest:

Taking a lump sum:

Borrowing enough of the equity in a house in a lump sum to pay off an existing mortgage is one of the most frequent uses of a reverse mortgage, says Prof. Moulton. More than 60% of reverse-mortgage borrowers have used the proceeds for this purpose, according to her research. “This actually may be a pretty smart strategy,” she says.
Prof. Moulton cites a recent report by Harvard University’s Joint Center for Housing Studies that found that nearly 40% of seniors age 65 and older carry a mortgage today, a rate that has more than doubled since 1992. “Using a reverse mortgage to pay off a forward mortgage frees up monthly cash flow to a household,” she says. “Essentially it has the same effect on a household budget as receiving a monthly annuity payment.” But lump-sum borrowing can go wrong. Harold Evensky, chairman of Evensky & Katz/Foldes Financial, a wealth-management firm based in Lubbock, Texas, generally advises against using a lump sum as leverage to increase debt—as a down payment on a second home or vacation home, for instance. “There may be circumstances that justify the strategy, but it’s not something that should be considered without carefully considering the potential risk,” he says. “The risk is overleveraging,” he says—taking on more debt than you can afford to pay off.

And even if that isn’t the case—if the homeowner spends the borrowed money without incurring additional debt, say on a vacation or a car—spending the equity in a home this way deprives the homeowner of a valuable financial cushion, he says.

Opening a line of credit:

Increasingly, advisers are suggesting that homeowners establish a line of credit through the HECM program whether they need the money immediately or not, because it can be used in several ways, as the need arises, to protect savings or even increase income in retirement.
A line of credit makes more sense than borrowing a lump sum and keeping it in reserve, says John Salter, an associate professor at Texas Tech University who has co-written papers with Mr. Evensky on reverse mortgages. That’s because, due to the intricacies of reverse-mortgage terms, the unused portion of a line of credit grows over the years, giving the homeowner access to more cash.

Shelley Giordano, chairwoman of the Funding Longevity Task Force, a Washington, D.C.-based industry group that promotes the use of home equity as a tool for retirement income, suggests setting up a reverse-mortgage line of credit as a way of protecting retirement funds from fluctuations in the financial markets.

Here’s the idea: In a bear market, homeowners can borrow funds as needed through the line of credit rather than withdrawing money from their investment portfolios. Withdrawals from a portfolio in down markets lock in losses and leave less money to grow when markets rebound. By borrowing instead, homeowners give the portfolio a better chance to recoup its losses when markets turn around.

Once the portfolio recovers, it can be used to pay off the line of credit, which is then fully available the next time cash is needed in a bear market. Ms. Giordano notes an HECM line of credit “cannot be canceled, frozen or reduced regardless of what the home value does in the future.”

An HECM line of credit also can be used as a source of income for those who want to delay applying for Social Security benefits and so increase their monthly payout when they do start taking benefits, Ms. Giordano says. After you apply for Social Security, you can stop taking money from the line of credit and, if you want, pay the loan back.

Because income from a reverse mortgage isn’t taxed, experts say an HECM line of credit can also be used—in place of taxable withdrawals from retirement accounts—to avoid tax-bracket creep, as well as the higher Medicare Part B and Part D premiums that can result from higher incomes. Ms. Giordano also suggests using a reverse-mortgage line of credit to pay taxes due on Roth IRA conversions. In the conversion process, distributions from IRAs are taxed as ordinary income, and experts often recommend paying those taxes with funds outside the IRA, because using money from the IRA for that purpose generates even more taxes.

Mr. Evensky says the usefulness of reverse mortgages belies the negative impression some people still have of them.

“I believe most criticisms relate to a myopic view of the product that has not been reviewed for decades,” he says. “Unquestionably there can be misuses of the product. But the problem is the use, not the product.”

The Reverse Mortgage has Won Some New Respect

Retirement funds getting stretched too thin? Ask your financial planner how the efficient new reverse mortgage can safely provide more money in retirement.

By Ryan Kleis

The current state of our nation’s retirement savings

With almost 80 million baby boomers expected to retire over the next 18 years financial planners could have their hands full with figuring out how retirees will meet their retirement goals.  Studies show that current retirement savings profiles will not provide enough cash for many in or approaching retirement age.  Looking at only at households made up of peoples ages 55 to 64 whose members are nearing retirement show less than 5 percent had retirement account balances that were on target to meet retirement savings targets.  Added to this is the research that indicates the average 65 year old couple will need to have an estimate $305,000.00 to cover out of pocket health care over their lifetime.  With so much at stake retirees and their financial planners are looking to other vehicles to help supplement their retirement planning.

The emerging trend of tapping equity to increase retirement income

While eliminating your monthly mortgage payment has always been a cornerstone of the benefits a reverse mortgage provides, financial planners are now discovering how powerful the guaranteed line of credit a Reverse Mortgage offers can be as well.  This guaranteed line of credit will be a great tool to help seniors tap some of the almost 4 trillion dollars in home equity they have.  This equity often referred to as “dead equity” can now put a spring into a retiree’s financial step.

There are several reasons a Reverse Mortgage guaranteed line of credit is so powerful and why financial planners are increasing looking to them as a retirement tool.  Here are just a few:

First of all this line of credit is guaranteed to be there regardless of your property value.  This is unlike a traditional line of credit from most banks that can be frozen if property values decline. This is very important because our real estate market is anything but stable these days and have and having access to one that is guaranteed to be there in any market condition is priceless.

Secondly, with this guaranteed line of credit you don’t make a monthly payment on it.  So now you have access to cash and you are not raising your out of pocket monthly expenses.  A traditional home equity line of credit requires you to pay on it monthly and the more you use it the higher your monthly payment goes.

A third benefit with this line is that is has a growth rate associated with it.  So not only is this line guaranteed to be their despite a crashing housing market, it can actually make more money available to you in an up or down market.  For Example, assume a 65 year old client were to have a $100,000 guaranteed line of credit with their Reverse Mortgage.  This same client could at the end of the year will have seen the available line increase to 104,768 and in 10 years increase to 158,530.  This assumes a growth rate of 4.611% and that the client let those funds grow untouched for those years.  We can see here how this leaves the traditional home equity in the dust as it would never have increased in available funds without some type of new approval from the bank.

The finally reason that a Reverse Mortgage guaranteed line of credit might work well for a retiree is simply it is easy to qualify for.  This loan does not require a good fico score and works well with a retiree’s limited income.  While most traditional equity lines have been getting harder to qualify for the Reverse Mortgage continues to be the path of least resistance to make the dead equity come alive again.

Retirement funds getting stretched too thin? Ask your financial planner how the efficient new reverse mortgage can safely provide more money in retirement.

Why Real Estate Agents Need Reverse Mortgages

By Ryan Kleis

America’s senior population is in the midst of unprecedented growth. There are now 10,000 baby boomers turning 65 everyday and this will continue for the next 18 years. With that being said access to affordable, comfortable and properly located housing can be the linchpin to happiness and well being in the senior years.

The problem that we have developing is that high housing costs can cause seniors to sacrifice spending for other important areas. Some of these areas include food, medicine, recreation and healthcare which effects their health and well being.

Where does a Real Estate Agent play in a role in helping our aging population offset this problem?

Real Estate agents can help our aging population by lowering their monthly housing expenses and thereby allow them to afford the items that will improve their health and happiness. A real estate agent has an important job coming for the next 18 years. As seniors find the need to lower their housing expenses their real estate agent can be the first helping hand in downsizing them to a more affordable housing situation.

While our seniors hold the largest amount of equity in the US, over 2 trillion by some estimates, what they are lacking is income in later years. Our U.S. population hits the peak of our earning potential in our late 40’s and declines from there. In retirement seniors usually have 80% of their bills and only 57% of their income. This puts real estate agents in a bit of a pickle. They need to help a senior downsize to a smaller home but the senior might not qualify for a loan to purchase it.

Real Estate agents now have a tool to help our senior population buy a home that can improve their health and happiness. This is a tool that congress approved in 2009 called The Reverse For Purchase. The reverse for purchase will allow a senior to buy a home with no fico score requirements, limited income documentation, bad credit and even a recent bankruptcy.

In essence a Real Estate agent is going to be in the best position to help our aging population enjoy a worry free retirement. They can show a senior how to free up money and start enjoying their lives instead of worrying about how to pay the monthly mortgage. Now that an real estate agent can use a safe FHA insured reverse for purchase loan it will make their jobs even easier. Their client can buy a property with only 48% to 25% down and never have a monthly mortgage payment again.

Why Real Estate Agents Need Reverse Mortgages

Eliminate Your Monthly Mortgage Payment and Put Cash in Your Pocket with New Reverse Mortgage

By Ryan Kleis

“I recently helped a homeowner in the City of Orange, Orange County CA use a Reverse Mortgage to pay off their current traditional mortgage to eliminate their monthly mortgage payments. Not only did the client eliminate their monthly mortgage payments they also qualified for a guaranteed line of credit with a growth rate to use as they wish. My Clients were beside themselves on how this amazing product changed their lives. Providing reverse mortgages and helping families for the last ten years of my life has been the most fulfilling outside of raising my children. THIS is why I do what I do. Feel free to call me at (800) 800-2190 to get educated about the NEW Reverse Mortgage and all its benefits.” -Robert Ross from Reverse Mortgage Educators

Eliminate Your Monthly Mortgage Payment and Put Cash in Your Pocket with New Reverse Mortgage

Being Over 62 and Having a Credit Score Over 800 Doesn’t Mean You’ll Get A Conventional Loan

By Ryan Kleis

Many seniors who have owned a home for many years and never missed a monthly mortgage payment have found that when they want to down-size, banks are not keen about funding a new mortgage.

A viable option is a “reverse mortgage” which allows the Senior to purchase a new home, using only a portion of the sales proceeds from the sale of his/her home and the reverse mortgage will up the balance. Plus, the borrower’s new home is now paid for and there are no monthly mortgage payments.

Let’s say you have rented for years and don’t have a home to sell, the “reverse mortgage” is still a very viable option. With the money you have in the bank you use for a down-payment and the “reverse mortgage” will pick up the difference. No longer will the Senior renter have to worry about rent increases or a Notice to Vacate.

It’s important to know that the only way a Senior could lose his or her home is if they are unable to pay their taxes, insurance, and home owner association dues.

If we detect this to be true with a potential client, we will advise that a “reverse mortgage” is not right for them.

 

 

Being Over 62 and Having a Credit Score Over 800 Doesn’t Mean You’ll Get A Conventional Loan

Reverse Mortgages Gain in Popularity!

By Ryan Kleis

More than 700,000 USA households have taken advantage of the benefits of a Reverse Mortgage, which allows homeowners 62 or older to convert a portion of their home equity into tax-free cash without giving up title. Besides the cash, the Reverse Mortgage borrower will no longer have to pay monthly mortgage payments as long as they live in the house.

Recently, the AARP conducted a nationwide survey of Reverse Mortgage borrowers and found that  94% said that a Reverse Mortgage is having a positive effect on their retirement. The top three reasons why senior homeowners, in this economy, have been choosing to take out Reverse Mortgages are:

• They need money to pay medical and credit card bills..

• Polls show that 80% of seniors don’t want to leave their homes.

• The third reason is they want to have extra money to enjoy their retirement. A Reverse Mortgage satisfies those three wishes.

“There are hundreds of senior homeowners who need cash and would like a reliable resource to explain the pros and cons of a Reverse Mortgage. That’s exactly what our firm does. First and foremost, we are educators. Before any presentation is made, education takes place.”

Ross adds, “It’s important to inform the homeowner that Reverse Mortgage Borrowers will never lose their homes if they pay the taxes, insurance, association dues and maintain their home. The title always remains with the borrower. If a person doesn’t have the funds to do so, then a Reverse Mortgage is not right for them.”

Although a Reverse Mortgage offers many great benefits, the question comes down to: is a Reverse Mortgage right for you? Robert Ross, Senior Reverse Mortgage Educator recommends:, “If you would like to know if a Reverse Mortgage is right for you, come by our new office or call (800) 800-2190 and  we will mail you a free educational DVD that explains the pros and cons of a Reverse Mortgage.”

Reverse Mortgages Gain in Popularity!