The reverse mortgage can be controversial, viewed as a last-ditch effort to fund long term care, Medicare premiums and other retirement health care expenses.
While the Home Equity Conversion Mortgage (HECM) does have a checkered past, it has become a sound option for retirement planning in recent years.
Still, relatively few advisors are aware of the HECM’s improved security and benefits. With greater government protections and more rigorous qualification standards, today’s reverse mortgages can be extremely useful for paying for health care while protecting other assets and income streams. They’re not for everyone, but any advisor with retiring clients should be aware of their rules and benefits.
Cause for controversy
“For people without firsthand experience who haven’t worked with the reverse mortgage in recent years, it is somewhat of a mystery,” says Jesse Allen, Executive Vice President of Alternative Distribution at American Advisors Group.
Congress created the HECM in 1987 to help seniors whose retirement savings had fallen short. They were aggressively pitched through television and radio ads as a risk-free way to gain extra retirement income. Over the next two decades, they took off.
But when the housing bubble burst, cash-strapped homeowners fell behind on tax and insurance payments, and defaults rose from 8 to 12 percent in a 4-year timespan. As a result, more than a few seniors lost their homes.
The good news is that can all be ancient history.
Rules and improvements
“The HECMs of the last few years are exactly the opposite [of the older mortgages],” says Gary Borowiec, RICP and managing partner at Atlas Advisory Group.
In response to the housing crisis, the HUD created its guidelines for financial assessment, which took effect April 2015. Now, lenders must analyze borrowers’ incomes and credit histories to determine whether they’ll be able to cover necessary expenses, and safeguards are in place to keep people from losing their homes.
To qualify for a HECM, a homeowner must be 62 years of age or older, and the house must be their primary residence. Loan amounts are determined by the HUD’s principal limit factor tables, which take into account age, home value and interest rates.
The current loan limit is $625,000. Generally, the older the borrower and the more valuable their home, the more money they’ll be able to get.
Unlike a home equity line of credit, a HECM only requires a one-time qualification and appraisal. Since the loans are FHA-insured, “you can always buy it back at 95 percent of that initial home value, even if it’s a loss to the bank,” says Borowiec. Borrowers are assessed on their abilities to pay property taxes, homeowners insurance and maintenance costs; they never have to requalify or refinance. As long as they live in their home, the line of credit remains in place.
The credit line growth factor
Borrowers can receive their money in a lump sum, fixed monthly payments, line of credit or combination of all three. For most clients – particularly those who plan well in advance – credit offers the greatest opportunity for savings and growth.
“The unused portion of the line of credit grows at the rate of return during the entire life of the loan,” says Allen. “This is unique to the HECM, and it’s the feature that most interests clients and advisors.”