by Daniel J Turner NMLS#1016716; Geneva Financial LLC NMLS#42056.

Copyright 2020 All rights reserved. Use by written authorization only.

On pg 1.10 of the text/outline it is made very clear to us that most Clients have 2:1 home equity to retirement savings. Often, Prudent planning urges us to suggest the Client open credit lines to have access to emergency funds, surplus cash, and other relevant uses of equity to solve problems. The “go-to” plan often suggested is a Home Equity Line of Credit (HELOC).

It is important for the Planning Professional to distinguish the various nuances and pitfalls involved with such programs, and discern the best and (ultimate consideration) must be for Client safety. While it is mentioned in this text more than a few times, the FHA HECM HELOC is not considered a “go-to” program for our consideration and integration into our practices. American College course study video presentations do not often suggest the Reverse in a first-place position, nor do they make any efforts to distinguish the difference and dangers of its more well-known brother (the “Fixed Rate FHA Reverse”) up front to begin laying a firm foundation for understanding these plans.

To wit, most of you are unaware there is a fixed rate reverse plan; those of you who do know this probably (for conventional lending reasons) prefer the Fixed concept over the Adjustable program. As someone who is more than familiar (and actively licensed) with the FHA and the jumbo HECM HELOC and fixed rate plans, this is concerning to me.

There are 3 general sources of Equity lines of credit in the common lending markets today; Federal Banks, Private lenders offering proprietary programs, and the general FHA HECM HELOC program. Private HELOC programs are a small percentage and very similar to the Federal Bank plans and are kept outside this discussion.

Let’s look at the bank HELOC…

True HELOCS are simple interest in structure (Rule of 78) compared to (Rule of 72) conventional mortgages. This conversation refers to true HELOCS. Some lenders offer “hybrid” plans that have a future draft allowance, but include an amortized principal sum with each mandatory monthly payment. The Rule of 78 also means that interest accrues on the declining balance, and that after the monthly interest is paid, the remnant goes to direct reduction of the debt balance and immediately reduces the upcoming monthly interest charge. Interest is only charged when principal is used (borrowed), and the HELOC may stand idle for the entire term (which is 10-12 years) without any interest charges accruing.

Think of a HELOC interest table like this: P=100 %=5 Term is 360 days=$5,000/360=$13.88/day as an interest charge on the equity used. If the $100,000 balance is reduced by a payment that exceeds the interest charge, next months interest charge will be lower; the additional funds are immediately re-available for the Borrower’s use.

Typically, a bank HELOC is a subordinated lien on the Borrower’s mortgage. It stands behind the first lien of the primary mortgage, and any other mortgage or lien on the owner title. If the home is sold, the first lien is satisfied, then any other liens, and then the subordinated HELOC is paid. For this reason, liens for HELOCS tend to be adjustable rate so that the Bank’s “interest rate risk” may be managed. Lending on a fixed rate with an open and usable line of credit may subject the Lender to serving future equity at rates below the market.

The Bank HELOC is not always a subordinated loan. Some home owners will choose to use the HELOC as a primary financing tool to provide equity without future refi expense, and also allow the Borrower to make payments that immediately reduce the debt significantly faster than conventional lending. This rapid reduction in principal may offset the exposure of future interest rate increases by such substantial reductions in the debt.

Bank HELOCs are callable (think “margin call”) for equity shortages in securities margin accounts. The FHA HECM HELOC reverse is not callable.

You can advise your client (I’ve had CFP’s who actually argued this) to get a bank HELOC to tap into home equity for emergencies or opportunities, but candidly? Why would you (professionally advise them) to take such an unnecessary risk?

Not only can the lender (call in) the line of credit and FORCE an immediate 20 year amortization? Banks can SUSPEND the line and force repayment. Imagine a Bank manager’s phone call to your Client demanding the balance repayment by Noon today for reasons beyond their control?

It doesn’t stop there.

They can also reduce the equity available. Additionally, equity line originations are fully underwritten when no existing mortgage is present. Since they’re not “conforming” loans, typical underwriting and expenses/costs/fees of fixed rate “Real Estate Service Provider Act” (RESPA) lending does not apply, and can be much higher. The access/use is only available for 10 yrs from origination and then it turns into a 20 year mortgage, or refi into (and spend more equity and money) to obtain another HELOC. What if you die and half the income your Spouse needs to refinance disappears with you? Is that a possibility? Yes, it is. How can the surviving Spouse qualify for  HELOC refi with half the income it took to do the original plan?

The reverse HELOC costs relatively the same once, but compared to 2-3 Bank HELOC refinances (If it’s even possible to qualify for additional HELOCS)? The Reverse HELOC wins. The FHA plan is insured; Bank HELOCS have utterly no protections for your Clients.

There is simply no comparison.

Why on earth is that an acceptable set of exposures for educated Planners?!? Yes, Planners—you should know better. Your Clients deserve the SAFEST choice.

The FHA HECM HELOC can not be suspended, reduced, or canceled. It’s guaranteed to add new equity value to the credit line for up to 150 years from the birth of the youngest borrower. No payments required. Federally insured. Federally regulated. Federally administered.

Guaranteed safe by the FHA contract with the Borrower Deed of Trust.

Think about this. You can be sued for giving flawed advice you  professionally offer.

 

Residents living in Hawaii Kai, Kaneohe, Waikiki, Ewa Beach, Honolulu, Wapahu, Pearl City, Kailua, Mililani, Manoa, Hilo, Kapole’i Kailua-Kona, Waikoloa, Honoka’a, Mountain View