MFOHome About Commentary Discussions Funds The Best Resources Support Us!

Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

Sign In Register

Categories

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

HECM Reverse Mortgage Thread

beebee
edited November 2020 in Other Investing
I am 61 years old and I am gathering information regarding reverse mortgages. Reverse mortgages become available to individuals after age 62. I plan on considering a reverse mortgage not for income (think annuity), but instead as a source for a growing line of credit (think HELOC). In a low interest rate environment, establishing reverse mortgage early (age 62), paying closing costs (much like a conventional mortgage), then maintaining a low balance (zero balance is better) creates a very interesting growth of line of credit for retirees who want to stay in their home.
This is an excerpt from Wade Pfau's book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement
Forbes Review of his book:
reverse-mortgage-calculator

HUD offers information on the topic:

https://hud.gov/program_offices/housing/sfh/hecm/hecmhome

https://hud.gov/program_offices/housing/sfh/hecm

This Calculator help you understand how much can be borrowed (think of this as a line of credit):

https://reversemortgagevalue.com/calculator/

Why not just take out a HELOC?
Benefits of a HELOC:

Lower interest rates in most cases
Lower upfront costs
May be more suitable for short term-needs

Benefits of a HECM:

Loan does not become due as long as all the loan obligations are met*
Line of credit cannot be frozen due to changing market values*
No monthly mortgage payments*
Source:
compare-hecm-to-heloc
Another one of the reverse mortgage advantages over the HELOC is the reliability that the HECM line of credit will stay open and available when needed. HELOCs are notorious for suddenly being decreased or being closed altogether, especially if the borrower has not been actively drawing from the loan. This is difficult because many borrowers prefer to have a line of credit available and open to withdraw from only if the time comes when a need arises. To be forced to stay actively borrowing on the credit line in order to keep an open status or finding out the line of credit has been decreased or closed suddenly would be frustratingly inconvenient for anyone.

The HECM LOC also has an advantage of significant line of credit growth potential. Taking out a HECM early in retirement and keeping the credit line open for use in the future proves to be a popular strategic plan. The unused line of credit grows at current expected interest rates; therefore, taking a HECM at 62 gives your line of credit time to grow as opposed to waiting until 82, especially if the expected reverse mortgage interest rates increase over time.
differences-reverse-mortgage-hecm-line-credit-home-equity-line-credit-heloc

An 8 Point Comparison of HECMs vs HELOCs:

https://mlsreversemortgage.com/title-bout-hecm-vs-heloc/

Comments

  • TheShadowTheShadow
    edited November 2020
    Reverse mortgages are very fee expensive and complicated for possible heir(s). Believe you will have to talk with counselor which is required where I live. Better to take out a HELOC than reverse mortgage. If you belong to credit union, you may find better rates on HELOC.

    Should you pursue a reverse mortgage definitely discuss with potential heirs so they are aware of it. There are time restrictions for heirs in which to satisfy the reverse mortgage should they want to keep the house.

    Tom Selleck will not do a reverse mortgage so why hype it?

    https://www.investopedia.com/mortgage/reverse-mortgage/5-signs-reverse-mortgage-bad-idea/

    https://www.reversefunding.com/pros-cons
  • beebee
    edited November 2020
    @TheShadow

    The disadvantage with HELOCs is they can be called in by the bank at the very moment they are most needed (such as during sequence of return risk). Many banks called in HELOCs during the GFC. The Line of credit of a HELOC can also be lowered by the bank.

    HECM LOCs grows over time, independent of the home's value: and cannot be called in.
  • TheShadowTheShadow
    edited November 2020
    A reverse mortgage should be the last resort if all other avenues have been exhausted as the related fees are extremely high. Heard of instances when family members thought they were going to inherit the home only to learn there was a large lien against property. The family spent a lot of time trying to get information on reverse mortgage which ate into their allotted time (think it was 90 days) to satisfy the outstanding loan. That is why the beneficiaries should be made aware of a reverse mortgage should it be taken.

    https://www.lendingtree.com/home/reverse-mortgage/how-to-get-out-of-a-reverse-mortgage/
  • JD_co
    Here's what scares me about Reverse Mortgage lenders. They had earned a bad rep for trying to pull the carpet out from under in the past. Like hawks, they look for an opening.

    For example, lets say you send in your HOA payment late. Certain Reverse Mtge companies would be all over that in an instant and POOF - the next thing you know you get a letter in the mail..... the lender is foreclosing your property. And you have no idea why.

    Maybe the Reverse Mtge arena is more regulated now, but this niche market has had it's share of issues. These commercials always look shady to me, and I don't care if its Broadway Joe or Tom Selleck doing the pitch.
  • beebee
    edited November 2020
    @ TheShadow,
    If a HECM is set up earlier rather than later the HECM's Line of Credit (LOC) grows over time and it grows irrespective of the property value. Waiting to open a reverse mortgage until you have no other choice (late in life) doesn't give this LOC a chance to grow. Wade Pfau goes into this concept in detail.

    One may never need to utilize the LOC, but setting it up early and letting the LOC grow will assure the best possible availability of credit later in life if needed.

    @JD_co, you do know that the reverse mortgage's LOC can be used to pay HOA, taxes and maintenance costs. It's the responsibility as a homeowner, not the bank, to stay on top of these responsibilities like any mortgaged property.
  • TheShadowTheShadow
    @bee

    Whatever you decide to personally do, you need to check with your state regulator to see if there are any complaints and the number of them registered. The regulator will not go into details of the complaint or name names, but you can get an idea about the company you are looking to transact with.
  • beebee
    Some of Wade Pfau's Articles on the Reverse Mortgage topic:

    https://retirementresearcher.com/?s=reverse+mortgage&post_type=post
  • davidrmorandavidrmoran
    >> thought they were going to inherit the home only to learn there was a large lien against property

    comedy bronze at least this is
  • beebee
    davidrmoran said:

    >> thought they were going to inherit the home only to learn there was a large lien against property

    comedy bronze at least this is

    Ignorant self absorb kids definitely tarnish a parent's shine for them. This can end up being "the last check bounced before they died" strategy.

    The main point is that a HE LOC is not the same as a HECM LOC.
Sign In or Register to comment.