48,794 Senior Homeowners take a HECM in 2016; Count the many benefits

September 7th, 2016  | by Jason Oliva Published in HECM, News, Retirement, Reverse Mortgage

48,794 homeowners took a HECM (Home Equity Conversion Mortgage) in 2016. They used their home equity in retirement to provide funding for a variety of projects, paid up their balances owed and for many of them, established a line of credit that actually earns a substantial growth percentage on their credit balances. If they don’t use the line of credit, it could become a larger amount than the mortgage they took out to establish it, and without payments in their lifetime and there’s a 50% chance the line of credit will exceed the value of the home itself.

A new webinar, co-hosted by Tom Dickson, who leads RMF’s Financial Advisor Channel, served to educate financial services professionals on refreshed ways of thinking about reverse mortgages, particularly within the context of retirement income planning. This involved a basic overview of the HECM program, including the recent program changes post-2013, as well as a variety of simulations depicting how a reverse mortgage can fit into a financial planning client’s retirement plan.

One scenario assumes a 62-year-old client with a home worth $625,500 in Pennsylvania. By taking a HECM line of credit, this client has $327,500 available to them at the time of the credit line’s inception. If the credit line is left to grow, after 10 years, the available proceeds available to the client will have grown to $613,365. By year 20, the credit line will have grown to $1,149,193.*

With this pricing option, the borrower receives a lender credit covering nearly all closing costs. The upfront cost of $125 is for a non-refundable independent counseling fee, on average, which the borrower pays directly to the counseling agency.

“This [reverse mortgage credit line] can basically provide another deferred income vehicle,” Dickson said during the webinar.

Opening a HECM line of credit can basically serve as a “put option” on the value of the home that can protect borrowers in the event that their home price falls in value, Pfau said.

“If interest rates don’t increase in the future, eventually the line of credit will grow to be more than the home value,” Pfau said. “If you start to introduce risk for home price fluctuations and the potential for rates to increase in the future, by age 82—for someone who opens a line of credit at 62—there’s a 50% chance that the line of credit can grow to be more than the value of the home.”

Unlike most retirement strategies and investments, where low interest rates could hurt, today’s current low rates are particularly beneficial for HECMs and the retirees who use them.

“Reverse mortgages are one of the interesting tools that work better in a low interest rate environment,” Pfau said. “Normally, low rates are bad for retirees—it makes retirement more expensive. Opening the reverse mortgage is one of the few strategies out there, relatively speaking, that benefits from a low interest rate environment.”

*This scenario assumes (1) 62-year-old borrower; (2) PA home valued at $625,500; (3) LOC will grow at 1.25% above the adjustable-rate mortgage, which uses the 1-year LIBOR plus a margin of 3.375%. Initial APR is 4.741% as of 6/21/16, which can change annually. Also assumed: 2% annual interest cap, and 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 9.559%; (4) the growth rate remains at 5.85%; (5) no draws by the borrower.

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