Part 3: Scenarios, Using a Reverse Mortgage Before or After Retirement
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Read Part 2 here: General Illusions of the Reverse HELOC – Disproved
In Part 3, I want to show you our lifetime in 2 capacities…Borrowing BEFORE retirement, and borrowing AFTER retirement. During your working years, you have “working era” mortgages. But, at 62? The Client has an option to leave that realm and own debt that helps them manage their equity during retirement. “Retirement-era debt” would be a reverse mortgage that cancels out the former “Recourse” mortgage, and substitutes a much friendlier “Non-Recourse” mortgage. (Non-Recourse means the collateral alone stands for the debt. No payments are required. Payments are optional depending upon the objectives that YOU and YOUR CLIENTS forge.
I would URGE ALL of you to READ a Reverse Mortgage Deed of Trust from any reverse lender. You will find the wording to be very one-sided…to the Borrower’s advantage. Just call any reverse Lender. They would be flattered to help you.
***And (another thing)…There are 2 types of Reverse Mortgage offered by the FHA (Insured). the “Fixed” rate, and the “Adjustable” rate. For the purposes of retirement income planning, we must consider the fixed rate as bordering unethical. It is a “one-and-done” program that is very hard to refinance, and deprives the Client of future equity use (as it has no included HELOC, and no bank can provide a hELOC against an FHA HECM plan. (this can be a “trick” question for you as you vet possible reverse loan officers as to their real competence with using it as a planning tool). Several Lenders have recently stopped offering the Fixed Rate option altogether. The adjustable rate has the HELOC provision built right in. The HECM HELOC has features one cannot find in any other debt vehicle. Even if they’re very close to the debt/equity ratio and there is no cash or heloc shown? Simply paying in a DOLLAR will create a $1.00 HELOC balance. Dollar-for-Dollar on every cent paid in. Installments or lump sums. Both are credited with daily equity at rates that are remarkable compared to other investments considered “Safe” money.
The Reverse HELOC cannot be canceled, suspended, or reduced in equity without Client consent; it is guaranteed to grow each day by that years renewed interest rate; it is guaranteed to last for up to 150 years from the birthday of the youngest borrower. For the purpose of structuring a reverse HELOC for retirement, it is best to think in terms of the opposite of what would be useful in a conventional loan. If your Client believes they will need MORE equity in their future retirement? They will want a higher margin to drive the HELOC growth at a higher velocity for future uses.
One caveat: If a spousal Borrower is under 62 and the elder spouse dies? (even after the younger Borrower is 62+?) They may remain for life; but the younger Spouse will not have any access to the equity, and any benefits paid during the life of the elder is immediately suspended. The younger must then refinance the debt into their own reverse…good luck. Making sure both Borrowers are over 62 is a “best practice”.
