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Reverse Mortgages hold advantages for the ‘mass-affluent’
Reverse mortgages can be a valid retirement planning tool for those in need of cash but also for those who are financially well off.
Last Monday the Huffington Post published “Is a Reverse Mortgage a Lucrative Option with your Financial Situation?”. Cited in the article was a white paper published by Edinboro University stating that using a HECM line of credit is more lucrative than selling investments. This speaks to the mass-affluent borrower with substantial retirement savings and investments as opposed to the needs-based-borrower of the past.
Beyond merely preserving the portfolio by not selling depreciated assets the study cites the tax benefits. “Commonly, retirees will use 401(k) funds, or other savings to pay off a mortgage. But if there’s enough equity in the home, the reverse mortgage could be used instead of using tax-deferred savings.” A good point since qualified…
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10 Comments
Do you have the ability (program) to do a ‘what if’ scenario for borrowers wanting to pay monthly MIP and interest accrued?
Thank you
Esther,
That would depend on the loan origination software (LOS) you are using. I haven’t seen any systems presently that allow for factoring in the borrower paying monthly MIP and interest to keep the loan balance down. Viewers? Any ideas?
Ms. Fuller,
While it is a great idea for the borrowers to continue paying down the balance due even after getting a HECM, one should not do it without meeting with a competent tax adviser who understands the principles of bunching of income tax deductions so as to maximize the benefits of both the Standard Deduction and itemized deductions depending on the type of mortgage indebtedness as defined by the Internal Revenue Code, acquisition or home equity.
Since acquisition indebtedness can be grandfathered, what may appear like home equity interest may in fact be acquisition to the extent that HECM proceeds replace acquisition indebtedness when the HECM is a refinance of another mortgage. In some cases depending on the use of the proceeds, interest may be deductible as business, rental, or other types of interest.
There is plenty of software that will provide an amortization schedule. If you know the math and how to apply it on an Excel worksheet, it is very simple and when done correctly is sufficient for the IRS.
The income tax benefits from bunching can be substantial. Again find a tax adviser who really understands and is competent in how interest can be deducted under income tax law. Also look at 2014 IRS Publication 936 for an interesting look at home mortgage interest; however, competent application of income tax law creates even more possibilities for the deduction of interest which includes bunching. (See http://www.irs.gov/pub/irs-pdf/p936.pdf )
What a great opportunity. Good luck.
(The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)
The Huffington Post article was fluff with no substance.
According to Google, lucrative means: “Producing a great deal of profit.” Yet does deferring the sale of a security today mean “a great deal of profit” tomorrow especially if the proceeds used to provide that bridge accrue interest and MIP? Who knows but as usual a writer at the Huffington Post is willing to make a very questionable conclusion.
Then there is the anecdote that it is common that “retirees will use 401(k) funds, or other savings to pay off a mortgage.” Notice they do not cite if the 401(k) funds come from Roth or fully taxable 401(k) accounts? That is because in part the practice is not common unless one is looking at the payoff of 10% or less of the original principal on the mortgage so no one tracks that data. Also withdrawing from most other savings does not result in tax.
By the way, the graduate schools at Edinboro University do not include business so where did this white paper come from?
Dear Cynic and all Normal Prople
Possibly you should check things out. The article on reverse mortgages that HP referred to was published in the Journal of Financial Planning, and was written by professors of finance at the Edinboro University of Pennsylvania. Here is a link to it:
http://www.onefpa.org/journal/pages/may14-hecm-reverse-mortgages-now-or-last-resort.aspx
Charles,
Your comment lacks substance. Why your comment lacks substance is that you provide no evidence that the published white paper referenced in the Huffington Post article is the same as the article that you attempt to link (but even then your link does not work, at least with Google Chrome).
You state: “The article on reverse mortgages that HP referred to was published in the Journal of Financial Planning, and was written by professors of finance at the Edinboro University of Pennsylvania.” Yet you do not bother telling us how you reach this conclusion. You just tell us it is. What connection do you have to the Huffington Post to make that statement?
On the other hand to be clear it is Michael Lazar the article’s writer who makes the following claim, not his publisher, the Huffington Post: “A white paper that was published by doctors at the Edinboro University of Pennsylvania brings some interesting shifts in thought to the reverse mortgage scenario. One recommendation made in the paper….”
How do you know that this is the specific white paper publication Michael references? There is no mention of any article in the entire article Michael writes but rather a published but named white paper by unnamed University of Edinboro doctors. Many times white papers are published and yet no article is published. Further many times articles like the one you tried to link are but summaries of published white papers. So where is the connection stating that the published white paper referenced in Michael’s article is the article you link?
You assumed something that may or may not be true but you want us to believe it is fact; yet it could easily be a figment of your rather fertile imagination. Please cite the conversation or provide the email where Michael tells you that the published white paper is the article you link.
It seems the reason that you address me personally is because of my earlier comment about the article by Michael Lazar yet you fail to state why you did address me personally. Your comment is what you think he was thinking of when he referenced a published white paper by unnamed doctors at the Edinboro University of Pennsylvania which has no graduate program in finance.
Nothing you state in your comment has any bearing on the comments I made on Michael’s article. Your comment does not even change the FACT that the University of Edinboro in Pennsylvania has NO graduate degree program in finance, period or that the doctors Michael states wrote the published white paper are unnamed. The worst thing is your article lacks any evidence about your claim that the published white paper is in fact the article you link or even related to it!!
For Esther,
On the keeping the reverse mortgage balance down …
A competent Reverse Mortgage Loan Officer should be able to prepare an Excel spread sheet showing you various scenarios. However, in the case of paying the monthly MIP and interest, the projection is quite simple. The balance remains the same for the life of the loan.
If you are planning on using a reverse mortgage and the unique line of credit feature to build cash for later in retirement, they you would want to pay more that the MIP and Interest to make the line of credit grow. Here again, a competent Reverse Mortgage Loan Officer could make a spread sheet to estimate the possible growth due to the addition to and growth factor of the line of credit. These would only be estimations, due to the unpredictable variables of the future.
There are situations where the heirs of the senior wants to keep the loan balance from growing. For instance, money is needed for in-home care, and the children are not able to pay from their monthly income. The children may want the senior parent to get a reverse mortgage for funding the care needed. Then, in order to preserve the inheritance value and keep the loan from compounding, the children could pay the monthly interest on the loan.
Mr. Guinn,
Making assumptions helps no one. You have assumed that the HECM involved is an adjustable rate HECM. With a fixed rate HECM, paying down the balance due does not increase the available line of credit. In the case of fixed rate HECMs where borrowers expect to live in the home until passing, making such payments will only result in loss of cash net of income tax benefits.
The pay down of a HECM provides possible opportunities for many seniors to take advantage of income tax opportunities that forward mortgages normally cannot offer.
It may sound like it is so nice for loan officers to do schedules for borrowers but if the loan officer has no idea how or why such schedules should be modified, then simply doing such projects without the assistance of a competent income tax adviser, the loan officer is potentially harming the borrower financially; something few loan officers want to do.
Not all borrowers need the help of tax advisers but it could easily be that their heirs could utilize accrued interest over one or two calendar years depending upon when the last surviving borrower passes away. Slowly paying down the accrued interest on a HECM may or may not be a great idea depending on the facts and circumstances.
(The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)
Mr. Guinn,
You claim the following on your website at
http://www.charlesguinn.com/optimizing-your-income-using-your-home-mortgage/
An adjustable rate HECM has a balance due of $300,000 and no line of credit. After 15 years of interest at 4.25% and regular monthly payments of $1,475, the balance due on the HECM will be $208,000 and the available line of credit will be $300,000.
Where do you get that information? It is bogus. If you assume that the average effective interest rate is 4.25% over 15 years then the monthly accrual rate (also known as the growth rate) is 0.4583333% monthly. The monthly accrual rate is simply the quotient of dividing the sum of the average effective interest rate of 4.25% and the ongoing MIP rate of 1.25% by 12. Then your estimated balance due becomes simple. After 15 years, the balance due is $272,125.44. The available line of credit in that case is $411,149.69.
But let us say that you intended for the estimated accrual rate to be 4.25% divided by 12 rather than 5.5% divided by 12. In that case the available line of credit after 15 years would be $370,498.99 and the balance due would be $196,385.88.
To come out with your numbers, the average effective interest rate on the line of credit would have to be 0.36% and on the balance due 3.21% which makes no sense at all.
It is examples like yours that bring up questions about loan officers providing mortgage payoff schedules. When I got my first home loan, I was at first rejected because the loan officer told me I could not afford the payments. After finally finding out what the payments were, I visited the offices of that savings and loan and in 45 seconds (calculators were slower back then) demonstrated how their computation was 35% too high (of course I had waited two hours to see the person with the authority to review the mortgage payment computation). In two days, I was notified that not only was my application accepted but the only thing holding up funding was guess what? You got it, the appraisal. The S&L also notified me that they had approved several others that they had previously rejected due to the error in their vendors’ software.
By the way I was a math major at UCLA before having to transfer out due to switching majors and the Regents removing undergrad business degrees when I was a senior. I saw you went there as well. What degree did you get there?
(The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)
I just read another Michael Lazar article on reverse mortgages and it is even more convoluted. See
http://www.huffingtonpost.com/michael-lazar/there-are-actually-3-types-of-reverse-mortgages_b_7976494.html
It seems Michael learns something about reverse mortgages, dreams up an article based on the first thing that comes to mind and the writes it. In the latest article posted on 8/13/2015, Michael describes reverse mortgages as fitting into three categories. The first are HECMs and the second are HECMs with tenure payouts and the third are proprietary reverse mortgages. It is an another very odd and unusual article.