REVERSE MORTGAGES 101

Transcription

1 REVERSE MORTGAGES 101 REVERSE MORTGAGE COSTS These four ingredients can be combined in several different ways by lenders: Origination fees Relates to home s value maximum is set by the government. Lenders may charge less, but larger lenders tend to charge the max. Smaller lenders may compete through lower origination fees or even credits to also offset other closing costs. Other closing costs - Fees vary and relate to typical costs for opening a mortgage titling and appraisal charges as well as payment for the mandatory counseling session. Some lenders provide credits to cover these costs. Servicing Fees Lenders are allowed to charge up to $35 per month, but it has become common to charge no explicit servicing fee, instead including it in the margin rate. Margin Rate Ongoing cost related to outstanding balance. Affects both the initial principal limit factor and subsequent growth rate of the principal limit. The lender s margin is part of the expected rate, and a higher lender s margin implies a higher expected rate, which in turn implies a lower principal limit factor. For example, a 62-year-old with a $400,000 home could see their initial principal limit fall from $190,000 to $145,600 by choosing a 4% lender s margin instead of a 3% lender s margin. SPENDING OPTIONS Spending options for adjustable-rate HECM reverse mortgages include: 1. Lump-Sum Payment: Take out a large amount at the beginning, though not necessarily the full amount available. 2. Tenure Payment: Works like an income annuity, with a fixed monthly payment guaranteed to be received as long as the borrower remains eligible. Allows for additional spending from the reverse mortgage even when the line of credit has been fully used. 3. Term Payment: A fixed monthly payment is received for a fixed amount of time. 4. Line of Credit: Home equity does not need to be spent initially, or ever. A line of credit can be used for a variety of contingencies later in retirement. Distributions can be taken from the remaining line of credit until it has been used in its entirety.

2 THE SPECTRUM OF POTENTIAL Spend Down Credit (Favors Low Margin Rate/High Upfront Costs) PORTFOLIO/DEBT COORDINATION FOR RETIREMENT SPENDING Pay off an Existing Mortgage Transition from Traditional Mortgage to Reverse Mortgage Fund Home Renovations to Allow for Aging in Place HECM for Purchase of New Home PORTFOLIO/DEBT COORDINATION FOR HOUSING Spend Home Equity First to Leverage Portfolio Upside Potential Coordinate HECM Spending to Mitigate Sequence Risk Use Tenure Payments to Reduce Portfolio Withdrawals FUNDING SOURCE FOR RETIREMENT EFFICIENCY IMPROVEMENTS Tenure Payments as Annuity Alternative Social Security Delay Bridge Tax Bracket Management or Pay Taxes for Roth Conversions Long-Term Care Insurance Premiums PRESERVE CREDIT AS INSURANCE POLICY Support Retirement Spending After Portfolio Depletion Protective Hedge for Home Value Provides Contingency Fund for Spending Shocks (In home care, health expenses, divorce settlement) Preserve Credit (Favors High Margin Rate/Low Upfront Costs)

3 THE PROS AND CONS OF LONG-TERM CARE FUNDING OPTIONS Self funding with personal assets Medicaid If no long-term care expense arises, cost is zero dollars Assets saved on insurance can be invested Any long-term care expenses will be funded through distributions from financial assets Your household assumes full risk of costs that could run into seven digits Investment risks for underlying portfolio Difficulty managing assets should a long-term care need arise Available to those with little savings Can be used after other resources have been depleted Requires relative poverty to qualify Reimbursement to facilities is generally lower than costs, so Medicaid recipients may receive lower quality care Could force family members to care for you, which can create additional family hardships Minimizes household risk Traditional long-term care insurance Premiums may be tax-deductible If it winds up unused, could be viewed as a waste of money Historically unmanageable premium increases (although they show signs of slowing down) Difficult to predict coverage Patient left to pay for items not covered Inadvertent lapsing Hybrid Insurance Upfront premiums guarantee against future premium increases and the risk of inadvertent lapsing Death benefit available if long-term care insurance is not needed Long-term care coverage is leveraged by a high deductible as the policy s cash value is spent first Fewer underwriting requirements than traditional long-term care insurance Large upfront premium removes assets from investment portfolio If interest rates rise, policy interest rates may fail to keep up

4 SHOULD I STAY OR SHOULD I GO? The and of Moving in Retirement PROS Moving to a smaller home for empty nesters can reduce time spent with home maintenance Move closer to children and grandchildren who have moved away Possibility to move to a neighborhood with lower property taxes, which can help the retirement budget Possibility to move to state with lower income taxes Possibility to live closer to hobbies and interests Can be used to set a long-term housing plan in place before mobility is reduced CONS Lose connections with community ties, family and friends Lose familiarity and stability built up with current community and residence Lose memories and good feelings about long-standing residence If home is owned, there can be pride in ownership and not having that debt to worry about Current residence can be bolstered with new technology and renovated to make living there easier as mobility declines Often less expensive to renovate than buy a new home Conditions to Facilitate Aging In Place HOME CHARACTERISTICS AND RENOVATIONS (UNIVERSAL DESIGN FEATURES) Walk-in showers and other bathroom safety features such as grab bars Single-floor living that doesn t require stairs (kitchen, bathing facility, and bedroom all on one floor), or an elevator allowing access to other floors Wheelchair accessibility: ramps to the home, wide doors and hallways that can fit a wheelchair. At least one entrance to the home should be wheelchair accessible Levers for door handles and faucets rather than a twisting knob Good lighting to see better if sight is diminished Accessible cabinets and closets, as well as lowered counters to allow for cooking while sitting Softened flooring to help cushion any falls, but no rugs or other floor items that could create a tripping hazard Accessible electric controls and switches that are not too high off the ground New technologies to monitor health status and medicine use

5 COMMUNITY INFRASTRUCTURE Trusted support for home maintenance activities such as lawn care, snow removal, and home maintenance Overall degree of neighborhood safety Availability of someone (family or friend) who can provide occasional checks and to help avoid isolation Availability of cleaning and food delivery services (including groceries) Availability of transportation options outside of using your own car, such as public transportation, taxis or services such as Uber, or volunteer services from non-profit organizations Access to a social network and enjoyable social activities Access to quality health care and long-term care WHERE SHOULD I MOVE? SMALLER HOUSE APARTMENT CONTINUING CARE RETIREMENT COMMUNITY PROS Converts some home equity into liquid assets - Gain equity and flexibility - No more property taxes or maintenance costs Prepared for longterm care needs in future. QUESTIONS? CONS Leave familiar house - Leave familiar house - No equity growth - Ongoing rent expense No equity growth Click Here to Contact Us McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. All investments involve risk. The information throughout this presentation is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable.