REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

For those with annuities set to run out of money in the future that are relying on that income and cash flow, what to do?

A prospect with an immediate annuity recently contacted us about looking into a reverse mortgage to replace the income she is receiving from her annuity that runs out in 5 months. She is widowed and also supported an older parent that lives with her. She has her mother’s social security and her own social security along with this annuity that was paying her just over $2000 a month. That annuity was basically paying for her mortgage each month and she was confounded about what to do when that money was no longer available.

She looked into selling the home but it would have been too stressful to find a place for both her and her mother so she started looking into other means. She tried to find a renter for a part of the home but found that no one wanted to pay rent, most wanted a hand out. She tried to refinance into a more affordable mortgage but found that her fixed income was not enough to get a better rate and found it hard to satisfy stricter lender guidelines. Her annuity rep had no answer for her other than to seek us out as he had read about reverse mortgages on this website and found us as this site pops up on the first page of under a search for reverse mortgage.

Her home’s mortgage eating up her monthly annuity payment, it made sense to pay that mortgage off and leave that extra money, almost $2000, in her pocket each month for the next 6 months until that annuity runs out. She went from having NO extra money a month while receiving $2000 in an annuity payment to an EXTRA $2000 a month with that annuity payment. Think about that for a moment. Her income is the same but she now has $2000 in disposable cash each month. That’s hard to get your hands around but since she no longer has a mortgage payment, a good portion of that extra money is going into a savings account for her and her mother, maybe a CD. She’s not using the extra money that was left in the credit line, that money is earning growth, but the money that was used to pay off her mortgage has removed a burden she was facing.

Its not an easy decision for her or anyone, but before you completely cast off any ideas about borrowing against your home’s equity, write down all of the other ways that exist in this world that allows you remain in your home, pay the bills and not have to worry about a mortgage payment for the rest of your life in your home and maybe have some money to enjoy life with. Can you, with certainty, know what the future holds and how your bills will control your life or can you manage how your life can control your bills?

Ignoring a problem will not make it go away. Stressing out about something you can’t control won’t add extra years to your expected lifetime. You’re hearing it from different sources, don’t look at your financial statement, just don’t open it. You know its bad and there’s nothing you can do about it. You see it on the , the and other sources.

If long term investors are being “advised” to avoid their monthly or quarterly statement then why are some of those same advisors telling their clients that reverse mortgages are too expensive and to consider alternatives to cash flow growth capabilities? It’s a question I have to ask and I’ve heard it directly from both client and advisor. If everything that you thought you knew about something proved to be false, what would you want to know about first?

Ask your financial planner if they agree that they may be challenged to provide the same certainty a reverse mortgage can provide and wait for their honest answer. The answer is they can’t. It’s not an indictment of their abilities, its just a fact their program does not contain the certainty that comes with a reverse mortgage as far as increase in cash flow capabilities. If someone is going to be critical of the entrance fees of a particular product they then need to offer information about the growth opportunities as well, that is, if they understand them.

Someone 62 or over that is currently paying a monthly mortgage can help themselves to extra cash flow by not having those payments anymore. They could sell, sure but they need to live somewhere and rent is not free. Someone providing elder care to a parent that doesn’t want to look into assisted living can use the proceeds from the home’s equity to provide cash flow for in-home, qualified, companion care- better care than we may be able to provide all the while living our also complicated lives. Some of us make the reverse mortgage more complicated than what it really is, a tool to increase cash flow (we are all guilty) but before you discount it as something that should be considered as a last resort, take some time to better understand who it can help and offer the help.

What do I mean by mean?

Just in case we forgot what the meaning of mean is, its the arithmetic average of a set of numbers. Our 6th graders know that as the mean, we know it as the average. In this particular instance, the mean is/are a set of years and their respective rates of growth (or loss) and also their respective rates. While its no secret that we have become a “here and now” society, expecting instant results for just about everything that we desire or come across, we should also remember that history shows the here and now mentality often results in a bubble that bursts. It doesn’t always end that way, sometimes its a softer landing but in most cases, there’s a correction and things kind of return to normal or they for good. Oh, and because we’ve become “here and now” people, when the mean or average changes more than normal, it becomes news and the news loves to create panic. I call it a campaign of fear. If we have 15 straight years of growth and one year of loss, the news and some pundits seem to want to throw out the previous 15 years of math and assume the new drop or gain will go on forever, essentially establishing its own “mean”. Unfortunately for the (forgive the pun) “hear and now” news, they as always, seem to get it wrong and things resume as almost normal- back to the mean.

For the past 15 years, reverse mortgages have been pegged to one index, the Treasury. They use the 1 year Treasury yield to calculate the interest that accrues on any money used (also called the initial rate) and they use the 10 year Treasury yield to calculate how much someone has access to (also called the expected rate). You can read more about that here and . A running mean for that 15 year period shows an What does that, er, mean? Right now the 1 year yield is .44. You add the margin to that to figure your initial rate and its ranged from 1.50 to 2.75 in the past 6 months (the margin has). The 1 year yield is not going to stay at .44, its going to come back up, there’s no where else for it to go. If you’re not currently in a reverse mortgage to stem your cash flow requirements, its going to cost you more in the future based on this mean data. The 1 year Treasury yield can not stay this low.

In addition, take a look at home values. They had experienced a relatively calm 4% mean growth until it all went haywire in 2003-5. Some areas experienced double digit growth for a couple of years at a time and we knew it couldn’t last but we loved following our equity growth. We bought and sold houses with that growth, we bought and sold business with that growth, we attempted to retire on that growth. In hind sight, it gave us a false sense of security and we tapped into it often, everyone said no problem, we’ll remove the boundaries to access that growth because its fueling the country. Everyone. We know how that ended. But now when it comes to reverse mortgages you’ll read about NOT tapping into your home’s equity or strong caution by such prominent sources as Bankrate, Kiplingers, FINRA, AARP, etc. I don’t have historical references from the growth days but I bet they were selling ideas based on growth (without the caution). Homeowners that think their values are going to jump back up have to understand the mean says they are probably at or near the levels they should be, based on the mean.

Take a look at an example of Phoenix home values from 1992 to 2016. The graph shows the mean while it also shows where values went off the map in 2003 time frame.

This all “means” now is a great time to tap into your home’s equity through a reverse mortgage as rates are low and your home’s value is not apt to go too far in any direction for awhile and if your retirement plan was pinned to S&P for example, take a look at another mean. In March 2000, the S&P 500 topped 1550, up more than 15-fold from its low in mid-1982. Although there were several bumps along the way (let’s not forget the Crash of 1987), there was only one calendar year out of all 18 in which the S&P 500 dropped: 1990, when it lost 3.2%. Overall, for calendar years 1982 to 1999, the S&P 500 enjoyed an annualized return of 18.5%. But now where does it stand.

What does it all mean?

What would you pay for access to $367,516 that you didn’t have to repay, ever, for as long as you lived in your home? What if you could gain access to that or a portion of that amount any time you wanted to, within 5 days of mailing in the request and you could do anything you wanted with it? What if that money was tax free? What if that money continued to grow in value and could be as much as $445,172? OR MORE?

How many more questions do I need to ask before you start saying “yes, yes, yes, lets have it? There’s got to be a trick here somewhere.”

I posed that question to a senior that was watching his retirement portifolio fall and fall and fall until he saw over $200,000 disappear in 6 months. His financial planner told him not to panic and he held pat at 80!. Holding pat at 65 may be a little easier to swallow but 80 is another story. How many years will it take to make up $200,000 in a retirement fund and what if that client needed money for a big ticket item like new roof, spousal care, companion care or anything for that matter? And what if they did take money from the remaining retirement account; they already lost $200,000, how much is left?

Of course there’s something left, they didn’t lose everything, but they lost a big portion, not because it wasn’t allocated properly, but because everything went down. I posed my question to this person because I told him he had a way to create a fall back plan and I wanted to know if it would help him sleep at night and he said its scaring him to death waiting for the other shoe to drop. For those saying he should move if he can’t afford to live there, his reply was that the home meant too much to him to move and with lower values and hard to come by credit for potential buyers, selling wasn’t even an option. “Where will I put my furniture and all my memories, there’s no room in a condo for all of it?”, he said.

How does he have access to $367,516? That’s the amount his original reverse mortgage credit line of $303,407 would have grown to in 5 years if he secured a reverse mortgage today at the age of 80 in a home worth $875,000; and that $367,516 is a conservative number. The credit growth rate is based on the 1 year Treasury or CMT (and its hovering near historic lows, currently 1.24) plus a margin of 1.75 to 2.00%. The average credit growth rate for reverse mortgages over the past 15 years is in the 6.20% area meaning his original $303,407 could be more like $397,998 if the index increases by just 2.00%. The $445,172 is the growth in 10 years using today’s growth rate, again at almost historic lows. If the CMT increases, his credit growth increases. This particular client isn’t in a house rich, cash poor position like we think of when that phrase is mentioned. He’s got cash and he’s got a house but he’s not rich. His quality of life just took a big hit and he’s got a way back into the game through a reverse mortgage.

He can use this money at any time he wants and if he doesn’t choose to, the costs are nominal for guaranteed growth. How much would be pay for access to $367,516?


…drumroll…NOTHING, not one penny…a reverse mortgage costs nothing out of pocket!

Edit: After multiple contacts from Seniors with lower home values, here is a breakdown for someone in a $300,000 home using the new fees to be put in place on or about November 1st.

A 70 year old couple living in a $300,000 home in Kansas would have access to $189,375 after November 1st. That money left in the reverse mortgage credit line for 5 years will accrue to at least $225,238 and in 10 years to $268,112. They, again, can use that money at any time, for any purpose and not have to pay it back until they pass away or move from the home.

Please let www.reverse-mortgage-information.org know if you would like to have your own scenario run.

The news headlines have been screaming impending castrophe for the past 2 weeks- Fannie, Freddie, AIG, Lehman, and WAMU’s failure on Thursday. When is it going to end? It could get worse say some while others believe its an opportunity for the Fed and Treasury to make money on the $700 billion plan. In the midst of this insecurity, the one thing that is becoming evident is that folks at all income levels need more finanical security than ever. A large holder of WAMU notes was a California based pension program. “JPMorgan is getting a steal compared with what they were going to pay,” said Scott Adams, a pension and investment analyst at the American Federation of State, County and Municipal Employees in Oakland, California, which owns WaMu shares. “It’s very tragic.”

Where does that leave the person depending on that part of their retirement if a portion of it is represented by something with those types of question marks surrounding its outcome? One things for sure, the index that most reverse mortgages are based on, the 1 year Treasury yield or CMT is staying very low as investors flock to safer grounds and the 10 year Treasury yield is following suit, currently at floor levels. This means you get maximum equity access for your particular scenario and the interest on the money you use accrues at or near 4.5% AND ITS GUARANTEED by the Federal Government. They WANT to lend you the money.

What’s that mean for the senior who is concerned their retirement portfolio is going to be able to support their current lifestyle? The folks most able to weather this storm have enough of their future income safely and securely allocated in products that aren’t adversely affected by these events. But those on fixed incomes with one or two social security checks coming in each month and that pension tied to these shaky financial institutions are probably looking for someone to choke about right now. If you combine that with Tuesday’s Federal Housing Finance Agency report that July’s home values have dropped another 5.3% and a recent report by the says that nearly a third of older households will be less secure in retirement because of the housing bubble, you’ll quickly realize equity from the home may be quickly dwindling and a hedge against that is a reverse mortgage. “Right now, older Americans — those retired or about to retire — are going through hell, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “They’re seeing the value of their 401(k) assets decline and facing risks that assets will go down even more in the future.

First, the downside if you don’t look toward a reverse mortgage. Your home continues to fall in value and a recent shows that hits older Americans the hardest, so until the housing market hits botton or stabilizes, how long will that be until they see relief? Credit is almost non-existant right now. Where does a retired, fixed income senior go for a loan in this environment? Your pension could be jeopardized if its tied to some of these failing financial institutions or your portfolio could be taking a real hit right now and is now the time to be tapping into it to fill the gas tank? At some point its not enough each month. Was that your plan?

Now, the upside. Lock in the maximum amount of equity access with a reverse mortgage. The 10 year Treasury yield (CMT) is what helps to determine how much equity you have access to and its at the floor level of 5.5% right now (which includes 2.00 lenders margin), and it won’t go lower. Once the loan is in place, you are guaranteed access to the net principle limit upon closing your loan. If your home value decreases, your access will actually go up if you put the equity access into the credit line function of the reverse mortgage. If you had access to a reverse mortgage credit line of $150,000 in a $250,000 home in July and your home value dropped 5% to $237,500 in Sept, your $150,000 credit line growth was about $1125 or 2 months worth the current rate of 4.5% (or $6750 a year, can your CD do that? Tax free?). Don’t take the reverse mortgage and wait another couple months and your home is now worth less and your access to equity will be less as well and you’ll have missed out on 4.5% credit line growth. If this financial tidal wave subsides and you retained the reverse mortgage and your home value starts to increase, not only does your credit line growth continue but your remaining equity increases as well if you took out the reverse mortgage.

The brainacs on Wall Street don’t know which way this wave is rolling, do you risk it getting worse or do you lock in now?

The recent signing of the HOUSING AND ECONOMIC RECOVERY ACT OF 2008 (HR 3221) by President Bush puts into motion something that has been long in the making and that’s a modernization of FHA rules for reverse mortgages. Some of the changes facing potential reverse mortgage clients are an increase in the national lending limit from the individual county limits now in place. Folks in some parts of the country will see their lending limit rise from as low as $200,160 to an anticipated $417,000 and that’s good news for those with home values over their county lending limits since any equity access was determined from the lower of the appraised value or the respective county lending limit. In many cases where the reverse mortgage was to utilized to pay off an existing forward mortgage there wasn’t enough cash access to pay off that mortgage and the borrower either had to come to the table with money or look for alternative methods which often led to selling the home and in a down market, that’s neither easy or fun.

Another change is with the origination fee, currently capped at 2% of the lesser of the appraised value or the county lending limit. The new bill will keep the 2% up to $200,000 but cap the origination fee at $6000 which is more than $1200 less than some of the highest fees where county lending limits were as high as $362,790. In that case, 2% of that amount would have resulted in an origination fee of $7255.80.

Higher lending limits combined with lower origination fees are great for those seniors whose circumstances have them looking at ways to increase their monthly cashflow without making risky investments in a roller coaster stock market.

Some new additions to the bill are for folks in co-ops and those looking to use the reverse mortgage as a finance tool to help them purchase a home, most likely in a downsizing event. Currently, only New York co-op owners are able to secure reverse mortgages because of their prevalence. There are other pockets of the country with co-ops and this will be a relief for those co-op owners as other means of financing have disappeared as most boutique programs are no longer available. In the event someone wants to downsize from a larger, more expensive home, the ability to purchase a home using a reverse mortgage is also a welcome addition. As an example, someone in a $400,000 home can sell the home, take a portion of the proceeds for purchase of a less expensive home, say $200,000, and instead of putting up the entire value in cash, they can put down a small portion, in this example, half of the value and finance the other half and not only do they eliminate monthly mortgage payments, they keep a larger portion of their cash in their pocket and in this market, cash is king. Instead of having $200,000 left over from the sale of the home, they now have $300,000 and no monthly payments as long as they live in the home. That’s also great for those that don’t currently qualify for a regular mortgage because of bad credit or insufficient fixed monthly income as those programs have gone the way of the other boutique programs once offered by most forward lending brokers.

Some other features are a prohibition against requirements to purchase additional products as a condition for HECM eligibility such as annuities or life insurance policies. That is good news as the recent negative information about reverse mortgages has been because of this very practice. Folks short on cash flow that need a reverse mortgage should not have their money tied up in any annuity, be it immediate or deferred. The reverse mortgage provides more cash flow with less restrictions than the annuity could anyway in most situations where monthly cash flow is short. Another mention is about a study to determine consumer protections and underwriting standards for HECMs which will help to insure that purchase of any additional products by a consumer is appropriate for the consumer.

We like the new changes, they are consumer protection focused and open up opportunities to help save some homeowners from increasing monthly payments on their forward mortgages that were having a harder and harder time making that increased payment amount and the homebuying function is a great tool for credit challenged or those looking to downsize into more affordable housing.

As the sub prime mortgage mess has unfolded over the last few months, reverse mortgages have gotten some positive press about being outside the fray and largely unaffected by the turmoil.

No more.

In the last week, several lenders and brokers have ceased origination of the new and popular HECM 100 reverse mortgages (more…)