Part 2: Disproving General Illusions About Reverse HELOCs
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Read Part 1 here: “How Financial Planners Can Use a Reverse HELOC to Help Their Clients.” Let’s continue on by addressing general illusions that many people about regarding the Reverse HELOC.
1. Loss of home. False.
It is a demonstrable FACT you have a substantially higher exposure to loss by keeping your current mortgage. Considering the money thrown away on mortgage interest? There cannot be a win. The HECM-HELOC is like an annuity contract in that it provides guarantees for certain established levels of performance. Safety of principal. Cannot lose your home. Access to equity now, and in the future. Cannot be cancelled, suspended, or reduced. Guaranteed growth. Stability regardless of market conditions. The conventional mortgage cannot compete with a Reverse HELOC.
ALL of these elements may be found in other devices, but not all in the same device.
2. Eats all the home equity. False.
It expands the home equity through the FHA insurance. The home is guaranteed a 4% growth rate each year for the lives of the borrowers. By raising the cap value of the home, the underlying equity is then driven to the borrower through the HELOC provision. As long as there are funds in the HELOC? Equity is added at the same % rate as the mortgage. A reverse actually makes it possible for the Client to “eat” the equity (and that’s a great thing). If ANY LOAN eats all the equity? Losing 60-75% of every house payment to mortgage interest seems to be the obvious thing Planners overlook.
3. Family can’t inherit the home. False.
First of all, the mortgage on their home will prevent them from acquiring the home and use the capital of the heirs to make mortgage payments until the home transfers to the new owner, or resources come to pay off the debt. The reverse allows over 14 months from the death of the last spouse before ANY monies must be paid. FOURTEEN MONTHS. The family has time to think. act. draw family conclusions. Execute. recover or wait out a bad market. raise funds. clean up credit reports. And MORE. The home will transfer by whatever estate plan the Clients made (often a Revocable trust)…
4. “Well, I have a friend/family member/etc who lost their home”… they lost it for non-payment of taxes or HO Ins or maintenance or mis/malfeasance.
FIRST and FOREMOST…the loan you’re referring to was prior to the 2013 corrections made by HUD and the FHA. It simply does not exist anymore. They rebuilt it and did a very good job of eliminating the negatives and adding substantial benefits to the program to be useful in retirement.
But, to further address this point? Think of it this way-If you own a piece of property and don’t pay the taxes? You will eventually lose the property regardless of whether there’s a note on the home. The Reverse had nothing to do with that. It IS fair to say that as we age it may become more likely we will forget to make those annual/semi annual tax and HO Insurance payments and get into trouble. There are legitimate work-arounds for this, and they involve YOU.
5. They’re really expensive. False.
One must recognize the differences between forward and reverse mortgages. I think you get the forward. The forward cannot be much help in retirement planning. the reverse never fails to help. A reverse is TWO mortgages on the same property. One covers the upfront equity/mortgage payoffs/distributions, HELOC. The other lien covers the unused equity, and is an expanding lien that encompasses all future property value growth for the duration of the loan., yet the closing costs are very similar. The difference is the FHA Mortgage Insurance Premiums. In this regard, Planners are quick to note “how very expensive the FHA mortgage insurance is” without acknowledging the value the insurance brings to the product. Candidly? I can make the same argument about Whole Life insurance, and yet, its value in estate and financial planning is legendary. It is time to admit (to ourselves) that we perform a dishonest thing to only look at any product from one perspective while dismissing and hiding the virtues of the product from those who would benefit the most from it.
