Financial Planners: What You Should Know
Another common misconception of reverse mortgages is that they are for people who are house rich and cash poor, and that should only be considered as a last ditch effort.
This belief couldn’t be farther from the truth. In fact, this belief could be costly mistake if this is their advice to their senior clients. However, if the financial advisor is focused on cashflow solutions for their aging clients, he would find that the reverse mortgage is an intelligent solution, and sooner than later
First, we all know that the reverse mortgage is often applied to payoff any existing forward mortgage and eliminating their mortgage payment. And that’s cash flow.
Second, the FHA reverse mortgage (HECM) credit line has a growth feature. This growth feature is usually misunderstood by the advisor, a costly oversight.
Any remaining available balance on the credit line will increase at the same rate as interest and MI being charged on the current reverse mortgage balance.
Allow me to demonstrate an example of the growth rate.
Here is a case study of a 72-year-old and a 3.80% growth rate:
- Home Value: $650,000
- Reverse Mortgage Qualified: $372,500
- Pay off existing Mortgage Balance: $175,000
- Remaining Available Credit Line: $197,500
If the borrower takes no additional draws, the remaining $197,500 will increase to:
- 5 years / age 77 = $218,929*
- 10 years / age 82 = $264,660*
- 15 years / age 87 = $319,944*
In this case, the financial advisor’s suggestion of a HECM resolved:
- Increased his clients cash flow by $1,300 a month or $15,600 a year
- Created a credit line for monthly or unforeseen expenses
- Eliminated the worry of running out of money by unlocking the home’s equity
How about a scenario for a 62-year-old with no mortgage and 4.56% growth rate?
- Home Value: $650,000
- Reverse Mortgage Qualified: $289,802
Again, this borrower takes no additional draws, the remaining $289,900 will increase to:
- 10 years / age 72 = $452,515*
- 20 years / age 82 = $706,584*
- 25 years / age 86 = $882,936*
*Assuming the one-year LIBOR does not increase or decrease over these years.
In this case the financial advisor looks brilliant 20 years from now.
Imagine if his client did not have long-term-care insurance (perhaps he was denied or he just didn’t want to pay the expensive premiums for 20 years). Now his client has over $700,000 available for long-term-care costs. If the client required a 24/7 caregiver that costs $20,000 a month, the client would be able to afford over three years of Cadillac coverage.
Therefore, it may be prudent for the financial advisor to seek reverse mortgage opportunities for his clients as early as 62 years of age, unlock the equity in their home and let the growth feature do the rest.
My goal is to make the advisor brilliant via the FHA reverse mortgage credit line growth rate (HECM).
Here is a list of items that the clients of my financial advisors benefited by the power of newly found cash flow with the reverse mortgage:
- Defer Social Security to age 70, an average increase of 8%
- RM disbursements are tax free
- Combine RM monthly disbursements to increase retirement income
- Avoid client from drawing down further on retirement account
- RM Disbursements are tax free
- Avoid tax consequences of selling off other assets
- Reduce monthly expenses by refinancing mortgage to a reverse mortgage
- Create a credit line with growth feature for future unforeseen expenses
- Maintain a “standby” cash reserve on LOC
- Cover monthly expenses and avoid selling assets at depressed values
- Pay for Medicare Part B and Part D costs
- Pay for health-related technology that enables you to live in home alone
- Learn H4P option
- Pay for long-term care needs
- Pay for short term in-home care or physical therapy following an accident
- Pay for a retirement plan
- Pay for estate / legacy planning
- Create an impound account (LESA) for pay property taxes and insurance
- Pay off credit card debt and avoid building new debt