Two cases where people with considerable equity leveraged new jumbo reverse mortgage options to solve real-world money issues.
Example one: eliminate an existing mortgage payment and fund $5,000 monthly healthcare. Example two: a home owner wants a second mortgage with no monthly payment.
In part one of this three-part series, we revealed how recent changes to the government-insured FHA mortgage program have made that loan less useful for those with higher-value homes. In part two we covered all the new ways jumbo reverse mortgages can help people access their wealth for less cost up front and less money over the long term.
This article demonstrates how options that weren't available in the beginning of 2018 are now the optimal way to accomplish the objective. If you'd like to see what you qualify for, click the Reverse Mortgage Qualifier button below and we will generate a report from our reverse mortgage calculator based on your unique situation.
Example 1 - Eliminate Mortgage & Fund Medical Expenses
Our first example is a couple, she is 69, her husband is 73. They own a house worth $1.25 million that has an existing conventional mortgage balance of $217,500. Their monthly payment is $2,487.
Because of her husband’s medical challenges, their expenses exceed their income by almost $7,500 per month. They need a plan that eliminates the existing mortgage payment and provides additional cash flow of $5,000 per month for the next 5 years. After that, maybe before, the house will be sold and Mrs. will move closer to her kids, in a smaller home.
Our couple and their financial planner are concerned that home prices are peaking and will soon drop. Below is a chart based on the advisor's expectations.
The advisor is also worried that interest rates are going to rise. We’ll model the 3-month LIBOR going from 2.7% to 5.6% and then settling back down to its 30-year average of 3.5%.
Because the home is worth more than $1 million, we need to look at jumbo reverse mortgage options because the FHA reverse will not offer enough money.
This couple needs to pay off their existing mortgage because they’re cash constrained on a monthly basis. Even though the interest rate on their current mortgage is under 4%, they can’t afford the monthly payment so the jumbo second mortgage is out.
Mrs. wants to preserve wealth because she will need it to buy her next smaller house and to support her in the future. She does not need a large lump sum because she’s not sure how to invest proceeds she doesn’t immediately need. Therefore, the jumbo fixed is out because it requires all proceeds are distributed at closing.
The two remaining options are 1) the jumbo fixed with deferred disbursement, or 2) the jumbo adjustable with the line of credit option. Looking at the pros and cons:
- Fixed – better if rates rise
- Fixed – worse because too much money is disbursed in first two years
- Adjustable with line of credit – worse if rates rise
- Adjustable with line of credit – better because additional money accessed when needed
The only way to know which option is better is to run the numbers through our proprietary Reverse Mortgage Illustration analysis tool and answer the three most important borrower and financial advisor questions.
The charts you see below were generated by the tool I built, which allows me to model just about any scenario. Detail of this level is important to add value to the financial planning process because better input leads to better output. Results, however, are not guaranteed because all assumptions are subject to change.
The first three charts below show the fixed rate jumbo that allows 40% of the principal limit (loan amount) to be disbursed not at closing, but in equal parts of the next 60 months. This is better than getting all the money up front, but not as good as taking it as needed.
Fixed-Rate Jumbo Reverse Mortgage with Delayed Distribution
Adjustable-Rate Jumbo Reverse Mortgage with Growing Line of Credit
The next three charts show the same net cash out, house value, and appreciation rates, but with the line of credit jumbo reverse - also reflecting rising interest rates.
No matter what you're analyzing, ask and get answers to these three questions...
Borrower Questions
1) How much can I get?
- The amount available is the same with both options
2) How long will it last?
- The line of credit option allows access to more money as shown in the green doted line two charts above. At year 5, there is still $5,203 available on the line of credit. This is entirely because of the credit line growth feature
3) At the end of our planning horizon, how much wealth is left?
- Jumbo fixed-rate; equity at year 5 = $417,428
- Jumbo line of credit; equity at year 5 = $443,296
Financial Advisor Questions
1) What is the cumulative cost of borrowing?
- Fixed = $181,435
- Line of credit = $151,538
2) How will a home equity solution affect other asset accounts?
- The total wealth access is nearly $510,000. If our example couple had that much money in other accounts, it could be left alone to continue to grow
- If they had to access it, they would have certain tax consequences they may rather avoid
- If they didn’t have other accounts, they’d have no choice but to sell their home and do something else
3) How does credit line growth increase borrowing power?
- $40,028 by year 5
- $50,003 by year 10
Example 1 - Conclusions
We looked at a fixed-rate jumbo reverse mortgage with the delayed disbursement option versus the new adjustable-rate jumbo with the growing line of credit.
Even though we modeled increasing interest rates, the variable-rate line of credit jumbo, had less interest expense, offered more borrowing power, and left $25,868 more equity at the end for Mrs.
This result would have been different if rates kept increasing through year five. Different assumptions always lead to different results. The point of this or any illustration isn’t to say that one strategy is better than another. Each case is different.
The point is to make sure you’re working with a professional who has the expertise and analytical abilities to run numbers on your specific case. In many cases, the value of our advice - the value of not choosing the wrong option - is tens of thousands of dollars or more.
Preserving wealth, for home owners and heirs is important. Let’s look at one more example; something we see often.
Example 2 - Keep Existing Mortgage, Pull $200,000 Cash Out
This is an example we see quite often and until recently, we didn’t have a good option. Most clients ended up doing nothing; their need unsatisfied.
A 73-year old client has a $1.3 million home with an existing $384,000 fixed-rate mortgage at 3.375%. They want $200,000 for personal reasons.
They can comfortably make their current mortgage payment but they have $900,000 in equity and want to access some of that wealth. These clients often say something like,
“On paper we’re rich. We have enough income to survive, but we can’t do things we want to do.”
This client’s challenge is they can’t qualify for a traditional bank HELOC (home equity line of credit) because they no longer have a job.
And they don’t want to convert an almost $400,000 existing loan into a new jumbo reverse at 6+% interest. Even clients who don’t have any heirs just can’t get comfortable with that. We ran the numbers and here are the results.
We compared 1) keeping their existing mortgage and getting a new jumbo second mortgage, versus 2) getting a new fixed-rate jumbo to pay off the existing loan and get $200,000 new cash out. Here are the results.
New Fixed-Rate Jumbo Reverse
- Cumulative cost of borrowing over 10 years = $593,957
- Equity at 10 years = $1,096,478
Existing Mortgage + Jumbo Second
- Existing mortgage, interest paid over 10 years = $109,540
- HECM 2nd, cumulative cost of borrowing over 10 years = $218,799
- Total = $328,339
Example 2 - Conclusions
Savings in interest and fees is $593,957 - $328,339 = $265,618 with the jumbo second mortgage option. That’s actually not an apples-to-apples comparison because our clients are still making a $1,989 mortgage payment.
A more accurate comparison would be if we compared keeping the existing mortgage and a jumbo second versus getting a new fixed-rate jumbo reverse and making a $1,989 payment on the jumbo reverse. So we looked at that.
In that case, the difference in equity between keeping the existing mortgage and taking out a $200k jumbo second, versus a new fixed rate jumbo reverse and making a $1,989 monthly payment, after 10 years, is $1,249,509 – 1,096,478 = $153,031.
Apples-to-apples, the client would have over $153,000 more equity by keeping their existing mortgage and getting the additional $200,000 with a jumbo second mortgage.
This makes sense because the interest rate is much less on the existing mortgage (3.375%) than on a new fixed-rate jumbo reverse. There are two reasons for this: 1) jumbo reverse mortgage fixed rates are higher than traditional conforming mortgage rates, and 2) we’re comparing a loan that was taken out in 2012 rate, with a really low rate, versus 2018 rates. That conventional mortgage rate today wouldn’t be 3.375%, it would be more like 4.875%.
I wanted to share this example because there are a lot of seniors with considerable equity and very low-rate existing mortgages. They’d like to access some of their wealth but they don’t want to touch their low-rate mortgage. Now they have an option!
Our expertise as a home equity solution specialist gives clients a sense of direction, which increases their confidence and helps them and their advisors feel comfortable they’re making optimal decisions.
Click the Reverse Mortgage Qualifier button below if you’d like us to help you understand your options and calculate the short- and long-term benefit of one choice versus another.
Why High Net Worth People Should Consider Home Equity Solutions
Very few people have enough money in their retirement accounts that they have no concerns about income, taxes, or health expenses in later years. Even those that do are concerned about preserving that wealth for future generations.
When I worked at Merrill Lynch and Morgan Stanley, we had access to sophisticated software that would calculate the probability of someone outliving their money. Based on life expectancy, I was shocked at how frequently mass affluent households were projected to run out of money based on their anticipated level of monthly spending. I’m talking people with over $1 million in retirement assets (stocks, bonds, mutual funds).
I remember thinking, "If these folks aren't going to make it, what about the rest of America?" Honestly, that question led me to reassess how I wanted to make my positive dent in the world. I felt I could make a bigger contribution in this field and I've been enjoying it ever since.
One mistake we always made was not considering wealth trapped in our client’s primary residence. Only recently have I seen a shift to a more holistic approach toward wealth management that includes considering home equity solutions.
Why? I think the shift is born of necessity. Most advisors have the unenviable position of trying to get their clients to withdraw money more slowly. Clients struggle because everything seems to cost more.
Most people don't have $2 million plus in retirement assets so the percentage of their account they're drawing annually is over the recommended 4-5%.
Some people tell us they're not worried because have a generous pension. Sadly, many seem worried their pension payment may get reduced or not survive.
The good news is, never before have homeowners with significant equity had so many choices and ways to intelligently and efficiently leverage home equity as part of an overall wealth management plan. This can take much stress off financial planners.
If you or someone you care about needs more information, click the Free Reverse Mortgage Qualifier button below.
Resources | References:
- New Jumbo Reverse Mortgage Options, Kent Kopen, 12/10/18, The Reverse Advisor – https://www.thereverseadvisor.com/blog/new-jumbo-reverse-mortgage-options
- FHA HECM Not For High Value Homes, Kent Kopen, 12/10/18, The Reverse Advisor - https://www.thereverseadvisor.com/blog/fha-hecm-not-for-high-value-homes
- 3-Month LIBOR, Federal Reserve Bank of St. Louis - https://fred.stlouisfed.org/series/USD3MTD156N
- Full Amortization Calculator - http://kopen.lendtelligent.com/fullamortization.aspx
Assumptions:
Delayed-disbursement Jumbo Reverse
- Principal limit 517,500
- Origination fee 1%
- Fixed rate 6.99%
- Other costs 3,289
- Liens 217,500
Jumbo second mortgage
- Index 3-month LIBOR
- Start rate 2.7%
- Index rate year 2 4.7%
- Index rate year 3 5.335%
- Index rate year 4+ 3.47%
Existing Forward Mortgage
- Start 5/1/12
- 3.375% 30-yr fixed
- Balance today 384,259
*Always review important financial decisions with your own legal and tax professionals.
About the Author
Kent Kopen earned his Reverse Mortgage Specialist credential in March 2007. Last year Kent earned the CRMP (Certified Reverse Mortgage Professional) designation. There are less than 170 CRMP designees in the United States. Mr. Kopen also provides education, tools, and strategies to professionals who offer financial and legal advice to others. "Our resources help financial advisors, CPAs, and estate planning attorneys help seniors optimize their home equity to provide greater security and peace of mind."
