securing retirement with a reverse mortgage:san diego mortgage and loans

Securing Retirement with

Home Equity Conversion Mortgages

2 San Diego Mortgage and Loans 760-500-1098

Agenda

HECM Basics

Borrower Protections

Fees/Costs

Product Misconceptions

Loan Amounts

Accessing Funds

Retirement Strategies

Right-Sizing the Home

Home Equity: The 4th component

Using home equity can help

supplement retirement income

and provide increased cash flow

• Provides tax-free cash*

• Requires no monthly mortgage

payments**

• Homeowners stay

in their home & retain title

*Homeowners should consult their tax advisor

**Homeowners continue to pay property taxes, homeowner’s insurance, keep up home maintenance. Although there are no monthly mortgage payments,

interest does accrue on the portion of the loan amount disbursed.


Retirement Planning Using Home Equity

Retirement Account & Savings

Social Security

Home Equity

Pension

4

San Diego Mortgage and Loans 760-500-1098

HECM Basics

What is a HECM?


5

A Home Equity Conversion Mortgage, HECM, is a loan that an

individual can take using the equity that they have built up in their home.

Program Features:

• Improves monthly cash flow by eliminating debt

• No monthly mortgage payments due1

• Loan proceeds are tax-free2

• Heirs inherit any remaining equity

• Net proceeds can be accessed

in multiple ways

• Interest may be tax deductible when

HECM is repaid3 1 Homeowners continue to pay property taxes, homeowner’s insurance, keep up home maintenance. Although there are no monthly mortgage payments, interest does accrue on the portion

of the loan amount disbursed. 2 Homeowners should consult their tax advisor. 3 IRS Website - http://www.irs.gov/publications/p936/ar02.html

http://www.irs.gov/publications/p936/ar02.html


Eligibility

• Youngest borrower must be at least 62+ years of age

• Homeowner must live in home as primary residence (6 mo. + 1 day)

• Must be able to pay off their existing

mortgage using the HECM loan proceeds

• Property must be an eligible property type


Additional Conditions • Borrower(s) must complete a HUD

approved 3rd party counseling session

• Property must be maintained according

to FHA requirements

• Borrower(s) must continue to pay

property taxes and homeowners

insurance

• Lending limit of $625,500

• HECM loan must be in first lien position

Borrower Protections


8

Non-recourse loan

3rd party counseling

Lien-holder not added to title

Property satisfies lien

Anti-steering regulations

Right of rescission

Program Protections – Repayment Events


9

1. Fails to pay taxes/insurance

2. Borrower no longer lives in/sells property

3. Fails to keep home up to FHA standards

No payments are required until a repayment event occurs.

Repayment events regulated by HUD guidelines

Loan Fees

San Diego Mortgage and Loans 760-500-1098 10

Reverse mortgages have many of the same fee types as a traditional

forward mortgage:

Loan Origination Calculation to determine amount

Fee $6,000 maximum

3rd Party Closing Appraisal, flood certification, title

Costs Examples insurance, notary, courier, recording, etc.

3rd Party Varies, depending on state/county

Closing Costs

Reverse Mortgage Specific Fees


11

There are two types of reverse mortgage specific fees, counseling

and mortgage insurance premium (MIP):

Counseling $75 - $125 average fee

HUD provides grant support making it

possible to get for free

Ongoing Mortgage 1.25% of loan balance annually

Insurance Premium

Upfront Mortgage .5% or 2.5% of max claim amount

Insurance Premium (depending on mandatory obligations)

Program Misconceptions


12

Myth # 1: The lender owns the home

Reality: Borrower retains title to home, no one is added

Myth #2: The home must be free and clear of existing liens

Reality: HECM designed to pay off existing liens

Myth #3: Loan proceeds are taxed

Reality: HECM proceeds are not income,

therefore not taxed

Myth #4: There are restrictions on

how to use proceeds

Reality: Any proceeds remaining after

paying off liens can be used however

the borrower wants, no restrictions

Myth #5: Only poor people need HECMs

Reality: HECMs provide an opportunity to diversify a portfolio and help

ensure against overdrawing existing retirement assets

13 13

Eq

uit

y A

vail

ab

le (

Pri

ncip

al L

imit

) Example: $500,000 Home Value

At Age 62, 72 & 82

HECM Loan Amounts – Net Proceeds

$263,000

$287,500

$310,500

$230,000

$240,000

$250,000

$260,000

$270,000

$280,000

$290,000

$300,000

$310,000

$320,000

62 72 82


Accessing Funds

Disbursement Options - Fixed


15

Fixed Rate Loan: With a fixed rate HECM, all proceeds

available in the first 12 months are

disbursed to the client at funding. No

additional funds will be made available.

Disbursement Options - ARM


16

Lump Sum: Draw some of the available cash at closing*

Credit Line: Access money when they need it. Does not add

to loan balance until used. Available amount of

borrowing power can grow.*

Monthly Guaranteed monthly disbursements.

Disbursements: Disbursements set for a specific period of time

(Term) or for the life of the loan (Tenure). Does

not add to loan balance until used.*

Combination: Choose 1, 2 or all 3 options simultaneously*

(changing disbursements also available)

*HUD limits amount of first year withdrawal to 60% of the principal limit or the borrowers

mandatory obligations + 10%, whichever is greater.

17 17

Example: $500,000 Home Value

62 Year Old Borrower

Source: Liberty Home Equity Solutions, Inc., Quote Packages October 7, 2013. San Diego Mortgage and Loans 760-500-1098

The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to

client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualif ied, professional investment and/or tax advice.

Line of Credit growth over the course of 30 years

LIBOR Disbursement – Line of Credit A

vail

ab

le L

ine o

f C

red

it

$252,497

$364,613

$526,511

$760,298

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

At age 62 + 10 Years + 20 Years + 30 Years

18 18

Example: $500,000 Home Value

62 Year Old Borrower

Source: Liberty Home Equity Solutions, Inc., Quote Packages Oct 17, 2013. For business professional use only. Not for consumer distribution. The preceding example and any

calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to client’s individual situation or

circumstance. Information contained within this strategy is not intended to replace qualified, professional investment and/or tax advice.

To

tal

Pa

ym

en

ts R

ec

eiv

ed

$1453/Month Throughout Retirement

LIBOR Disbursement – Tenure Payments

$174,450

$348,900

$523,350

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

10 Years 20 Years 30 Years


HECM Strategies for Retirement

Hedge Against Home Declines

20

Impact on HECM LOC in declining housing market

Amount available dependent on home value

No monthly mortgage payments required

Available LOC balance will continue to grow if no draws are taken, regardless of home value

Source (LOC): Liberty Home Equity Solutions, Inc., Quote Packages October 7, 2013. Source (Home Values): No supporting documentation available. Declining home values are based on assumptions due to the economic climate in recent years. San Diego Mortgage and Loans 760-500-1098

$252,497

$271,751

$338,779

$500,000

$530,604

$424,483

$271,669

$282,645

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

62 63 64 65 66 67 68 69 70

Line of Credit Home Value

Client Facts: 62 year-old clients need to retire due to health

issues. $200,000 in retirement account,

relying on social security. Claiming social

security now will not provide enough income.

Home value is $500,000. No current mortgage.

Solution: Use a HECM to increase cash flow to a

sufficient amount to allow them to retire now,

but wait until age 70 to claim social security.

21


The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or

accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified,

professional investment and/or tax advice.

Case Study - Deferring Social Security

22 22

Monthly Disbursements By Age

Source: AARP online social security website calculator. $40,000 avg salary for one spouse, $20,000 avg salary for other spouse. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to


Mo

nth

ly S

ocia

l S

ecu

rity

Paym

en

ts

Age of Claiming Social Security

Claiming Social Security

$1,958

$2,437

$3,447

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

62 65 70

23 23

HECM Options

Source: Liberty Home Equity Solutions, Inc., Quote Packages October 17, 2013. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to


Mo

nth

ly R

evers

e M

ort

gag

e P

aym

en

ts

SS = $1958/Month @ age 62

SS = $3447/Month @ age 70

Deferring Social Security

$1,453

$2,016

$3,338

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Tenure @ 62 8 year term w/100k LOC

8 year termw/out LOC


HECM Strategies: Deferring Social Security

Source: MoneyGuide Pro Illustration July, 2012




Probability of successfully deferring SS

Client Facts: 62 year-old clients, $500k retirement account,

home value $500k, current mortgage $0.

Assumptions: Need $40k (plus SS) in first year, 3% annual

cost of living inflation,15% tax bracket, S&P

500 annual returns (1983 – 2012) used for ROI

Solution: Use HECM funds to offset increase cost of

living expenses to extend portfolio.

25





Case Study – Stretching Retirement Account

26 26

Source: Calculations based on assumptions listed on previous slide. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to


Acco

un

t B

ala

nce

HECM Solution – Stretching Retirement Account

Age

Savings Stretch From 18 to 30+ Yrs

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93

No HECM With HECM


home value $500k, current mortgage $0. Need

$40k (plus SS) in first year




Solution: Use HECM funds to during S&P 500 down

years to allow value of assets in retirement

account to rebound.

27





Case Study – Allow Retirement Account Rebound

28 28

Source: S&P 500 from 1983-2012 and calculations based on assumptions listed on previous slide. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to


Acco

un

t B

ala

nce

HECM Solution – Retirement Account Rebound

Age

: Living expenses drawn from retirement account

: Living expenses drawn from HECM LOC

Line of Credit balance = $400,000 at age 93

S&

P 5

00 R

etu

rns

16.81%

2.34%

17.62%

-9.85%

8.03%

21.27%

34.11%

20.26%

31.01%

-10.14%

-23.37%

26.38%

3.00%

13.62%

3.53%

-38.49%

23.45%

12.78%

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93


home value $500k, current mortgage $0. Need

$40k (plus SS) in first year




Solution: Use HECM funds to delay draws from

retirement account until RMD is required.

29





Case Study – Defer Drawdown Until RMD

30 30

Source: Calculations based on assumptions listed on previous slide. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are

hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to client’s ind ividual situation or circumstance. Information

contained within this strategy is not intended to replace qualified, professional investment and/or tax advice.

Acco

un

t B

ala

nce

HECM Solution – Defer Drawdown Until RMD

Age

HECM LOC covers expenses through age 68 RMD exceeded necessary expenses age 78 - 89

$770k remaining in retirement acct @ age 93 $415k left in LOC if excess RMD paid back into RM

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93

No HECM With HECM

RIGHT-SIZING THE HOUSE

For business and professional use only. Not for consumer distribution. 31

32





Right-Sizing the Home Example

Client Facts: 70 years-old

$500,000 current home

$0 existing mortgage

$350,000 new home

Does not want any monthly mortgage

payment with new home

33





Sales price existing home: $500,000

Selling costs (commission, fees etc.): $40,000

Net proceeds: $460,000

New home price: $350,000

Remaining funds: $110,000

Right-Sizing the Home Example – No HECM

34

Source: Liberty Home Equity Solutions, Inc., Quote Packages October 16, 2013. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to client’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified, professional investment and/or tax advice.

Net proceeds from home sale: $460,000

New home price: $350,000

HECM for Purchase funds: $197,400

Borrower funds to complete purchase: $166,853 (includes loan closing costs)

Remaining funds: $293,147

Right-Sizing the Home Example – HECM

Transaction similar to home refinance

It’s Flexible

• Fixed or adjustable rate

• Proceeds may be accessed in multiple ways and borrowers can change disbursement methods

It’s Safe

• FHA insured (HECM)

• Consumer counseling required

It’s Useful

• Use as a monthly cash flow tool

• Credit line

• Relieves existing debt and monthly mortgage payments

• Purchase a home (right-size or move to “retirement friendly” community)


Summary


Thank you for your time.


APPENDIX


37

38 38

Source: S&P 500 from 1983– 2012. San Diego Mortgage and Loans 760-500-1098 The preceding example and any calculations therein are hypothetical and are for illustrative purposes only. We do not guarantee applicability or accuracy in regard to


An

nu

al

Retu

rn

S&P 500 Annual Returns

Age

Annual returns of the S&P 500 beginning in 1983 and ending in 2012

Age 62 is assumed to be 1983, 63 is 1984, etc.

16.81%

2.34%

17.62%

-9.85%

0.35%

21.27%

7.06%

-1.54%

34.11%

20.26% 19.53%

-10.14%

-23.37%

26.38%

3.00%

13.62%

3.53%

-38.49%

23.45%

0.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93

S&P 500 Annual Return

• Adjustable Rate HECM (ARM) – A HECM which has an interest rate that is subject to change, usually on a monthly or annual basis.

• U.S. Department of Housing and Urban Development (HUD)

• Federal Housing Administration (FHA)

• Home Equity Conversion Mortgage (HECM) – A reverse mortgage insured by the Federal Housing Administration.

• Good Faith Estimate – Lists the approximate closing costs of obtaining a loan.

• HECM for Purchase – A HECM that is used to help finance the purchase of the borrower’s principle residence.

• Lender – A bank or institution licensed to originate residential mortgage loans.

• London Interbank Offered Rate (LIBOR) – The average interest rate that leading banks in London charge when lending to other banks. It is the index used as the basis for Adjustable Rate HECM's.


Glossary of Terms

39

• Line of Credit (LOC) – A HECM disbursement option whereby the borrower receives the loan proceeds in unscheduled payments or installments, at times and in amounts of the borrower’s choosing, until the line of credit is exhausted.

• Lump Sum – Receive all proceeds at loan closing.

• Non-Recourse Loan – In regards to a HECM loan, this term describes the fact that a borrower or their heirs will not owe more than the home is worth when the home is sold to repay the loan.

• Mortgage Insurance Premium (MIP) – Protects the borrower and lender in case the loan balance grows higher than the home value when the loan becomes due.

• Reverse Mortgage – A home loan that allows senior homeowners age 62 and older to access a portion of the equity in their home.

Glossary of Terms (continued)


• Servicing – The maintenance of the loan after it is originated. It includes services such as providing regular statements and providing loan disbursements to the borrower as requested.

• Tenure payments – Monthly payments throughout the life of the loan.

• Term payments – Equal monthly payments that are disbursed for a specified amount time.

• Total Annual Loan Cost (TALC) – The projected annual average cost of a reverse mortgage, including all the itemized costs.

• Right of rescission – A three business day time period after a loan closes in which a borrower may change their mind and cancel the loan.

Glossary of Terms (continued)


securing retirement with a reverse mortgage:san diego mortgage and loans

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