A Financial Professional’s Guide to
Assisting Clients in Retirement
Leverage home equity as part of your client’s financial strategy
Market volatility, rising healthcare costs, and longer life spans often make traditional retirement funds inadequate, which risks asset depletion for many at or near retirement. Despite higher housing wealth, many don’t choose to tap into home equity.
A NAF Home Equity Conversion Mortgage (HECM) or reverse mortgage can be crucial, leveraging their primary asset—home equity—to enhance retirement funding, combat inflation and elevate living standards.
Reverse HECM Overview
• Similar to a home equity line of credit (HELOC)
• HECMs are available in all states for clients age 62+
• Non-FHA Reverse products available in limited states for pre-retirees, age 55+ with higher valued homes
• Provide for a better quality of life
• For refinance or purchase of a new property
• Not required to sell the home or give up title
• Does not have to be repaid to the lender until a maturity event occurs
Americans Ages 65+ will near 100 million by 2060*
By 2035 the number of Americans age 65+ will exceed the number of children**. This is because there are 10,000 Baby Boomers turning 62 each day – averaging about 300,000 per month and 3,600,000 per year! This creates a tremendous opportunity for financial professionals to set their clients up for a comfortable retirement when evaluating housing wealth as part of their retirement income strategy. The benefits of monetizing home equity can include:
• Aging in place and long-term care
• Living the lifestyle they’ve become accustomed to
• Hedging against market volatility and inflation
• Managing cash flow
• Balancing growth and income
*Population Bulletin, Population Reference Bureau, 2015, Vol. 70, No 2
**Source: U.S. Census Bureau, 2017 National Population Projections
Addressing Client Concerns
Reverse mortgages have undergone 3 major regulatory and product updates over the last 15 years. While there may still be some outdated assumptions about the concept, it is the modernization of the product which has caused the financial news media to take a positive view of monetizing home equity.
• Today’s reverse mortgages serve as a valuable retirement tool to help optimize retirement income planning.
• Can be utilized to generate income that safeguards assets or establishes a ‘safety net’ for unforeseen future expenses.
• Assists active adults in maximizing cash flow by retiring high-interest credit card and consumer debt.
• Clients can leverage home equity to hedge against healthcare costs, housing and home health care.
MYTH #1
The bank will take my home away from me
FACT
This is a non-recourse loan. Your client retains ownership of the home provided they keep up with property taxes, homeowner’s insurance, and HOA assessments.
MYTH #2
I won’t be able to qualify because I already have a mortgage FACT
As long as there is sufficient equity, all mortgages/liens will be paid off.
MYTH #3
My heirs won’t inherit my home.
FACT
Like any other mortgage, your heirs can inherit your home. They have three options when the loan balance comes due:
1. They can choose to refinance the loan balance and retain the home.
2. Sell and keep all funds. after the mortgage is paid off.
3. Purchase the home for 95% of the home’s appraised value.
MYTH #4
Reverse mortgages are too complex for my clients FACT
A HECM is designed to assist retirees. By leveraging home equity for income, it enables retirees to remain in their homes with greater financial freedom and security. Additionally, robust state and federal regulations are in place to safeguard borrowers.
MYTH #5
A HECM should only be used as a last resort FACT
Reverse mortgages have been modernized to meet the needs of the 62+ demographic. They serve as a strategic reserve for future needs and have gained acceptance as a critical component of retirement income planning.
Here are some questions to consider when determining if your client can benefit from a Reverse Mortgage as part of their retirement income strategy
• Are your clients concerned about income or estate taxes?
• Do your clients have a long-term care plan in place?
• Do your clients have cash in reserves to manage unexpected expenses?
• Is your client currently paying a monthly mortgage payment?
• Do your clients have an existing line of credit as a backup source of liquidity?
• Is your client interested in legacy planning while still living i.e.: charity, trusts, family assistance?
Three Main Purposes of a HECM
1. Useful Retirement Tool
Housing wealth provides your clients additional liquidity along with increased financial flexibility when leveraged as part of their overall financial strategy. Financial requirements and credit and income qualifications have enhanced the safety of HECMs more than ever before.
2. Extend Portfolio Lifespan
Academic research supports treating housing wealth as an asset class to not only extend the lifespan of clients’ retirement portfolios but also to increase their legacy. Benefits of a reverse mortgage
• An alternative source of cash flow
• Portfolio longevity
• Increased legacy while reducing taxable income
Housing wealth can greatly enhance the odds of retirement income success when it is treated as a distinct asset class as part of the retirement income plan. In addition, it acts as a shock absorber during market corrections by providing an additional source of liquidity.
Benefits of a HECM Line of Credit
• The unused portion grows monthly regardless of the home’s value
• Provides a hedge against inflation and declining home prices
• Can be an additional source of liquidity during market corrections or economic shocks
3. Diversify Retirement Plans
A reverse mortgage provides tax-free cash flow which allows clients to access their home equity without creating a taxable event. There are various distribution options such as:
• A line of credit
• Lump sum
• Tenure
• Term payments
• Combination of above
A reverse mortgage eliminates monthly mortgage payments, which frees cash each month for clients to use more effectively. However, clients must stay current with property taxes, insurance, and HOA dues.
HECM without a mortgage balance*
$2,000,000
* Information shown for illustrative purposes only. Assumptions are: (1) 75-year-old borrower; (2) Home in zip code 46825 valued at $550,000; (3) LOC will grow at the same rate as the interest rate, currently (6.0%) plus the annual mortgage insurance premium charged to the loan (0.50% of the principal) for the HECM CMT Cap5 Adjustable-Rate Mortgage (ARM), which uses the 1-Year CMT plus a margin of 2.125%. Initial APR is 5.875% as of 08/05/2024, which can change monthly. 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.875%; (4) no draws by borrower. Interest rates and funds available may change daily without notice.
HECM without a mortgage balance*
Scenario: • Home value – $550,000
1st mortgage – $0
Principal Limit (PL) – $250,200
MIP – $11,000
Max OF – $6,000
* Information shown for illustrative purposes only. Assumptions are: (1) 75-year-old borrower; (2) Home in zip code 46825 valued at $550,000; (3) LOC will grow at the same rate as the interest rate, currently (6.0%) plus the annual mortgage insurance premium charged to the loan (0.50% of the principal) for the HECM CMT Cap5 Adjustable-Rate Mortgage (ARM), which uses the 1-Year CMT plus a margin of 2.125%. Initial APR is 5.875% as of 08/05/2024, which can change monthly. 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.875%; (4) no draws by borrower. Interest rates and funds available may change daily without notice.
HECM with a mortgage balance*
Scenario:
• Home value – $550,000
• 1st mortgage – $100,000
• Age 75
• Principal Limit (PL) – $250,200
• MIP – $11,000
• Max OF – $6,000
• 3rd party fees – $2,731
• Expected rate – 5.875%
• Line of credit (LOC) – $130,518
• LOC growth rate – 6.5%
• Initial Balance – $119,731
* Information shown for illustrative purposes only. Assumptions are: (1) 75-year-old borrower; (2) Home in zip code 46825 valued at $550,000; (3) LOC will grow at the same rate as the interest rate, currently (6.0%) plus the annual mortgage insurance premium charged to the loan (0.50% of the principal) for the HECM CMT Cap5 Adjustable-Rate Mortgage (ARM), which uses the 1-Year CMT plus a margin of 2.125%. Initial APR is 5.875% as of 08/05/2024, which can change monthly. 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.875%; (4) no draws by borrower. Interest rates and funds available may change daily without notice.
HECM with a mortgage balance*
Assuming 1% home value growth Assuming 1% home price appreciation
1% Appreciation - No Mortgage Balance
Principal Limit Line of Credit Home Value
Scenario:
• Home value – $550,000
• 1st mortgage – $100,000
• Age 75
• Principal Limit (PL) – $250,200
• MIP – $11,000
• Max OF – $6,000
• 3rd party fees – $2,731
• Expected rate – 5.875%
• Line of credit (LOC) – $130,518
• LOC growth rate – 6.5%
• Initial Balance – $119,731
* Information shown for illustrative purposes only. Assumptions are: (1) 75-year-old borrower; (2) Home in zip code 46825 valued at $550,000; (3) LOC will grow at the same rate as the interest rate, currently (6.0%) plus the annual mortgage insurance premium charged to the loan (0.50% of the principal) for the HECM CMT Cap5 Adjustable-Rate Mortgage (ARM), which uses the 1-Year CMT plus a margin of 2.125%. Initial APR is 5.875% as of 08/05/2024, which can change monthly. 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 11.875%; (4) no draws by borrower. Interest rates and funds available may change daily without notice.
Available Equity & Costs
Borrower proceeds are calculated using tables set forth by FHA and private investors (for non-FHA products)
• Based on the age of the youngest borrower, or eligible non-borrowing spouse
• Over $1.1 million – The lesser of the home’s current appraised market value, or the FHA lending limit ($1.149 million for 2024)
• The expected interest rate
Fees
• A mortgage insurance premium (MIP) on the appraised home value* that is paid to HUD. There are non-FHA products available with a different pricing structure
• All reverse mortgages are non-recourse loans, which means that your clients will never owe more than the home is worth
• Fees are included in the loan amount aside from the required counseling fee
• Traditional third-party closing costs
*up to a maximum home value of $1,149,000