Are Reverse Mortgages Still Viable As A Financial Planning Tool?Advisor Perspectives
All of this may sound too good to be true, and it probably is to some extent. Perhaps this is why it is difficult to grasp the concept of line of credit growth throughout retirement. I’ve already noted that unused lines of credit work for borrowers to the detriment of lenders and the government insurance fund. Such use of a reverse mortgage still exists today and would be contractually protected for those who initiate reverse mortgages under the current rules. At some point in the future, I expect to see new limitations about line of credit growth, especially as more people start to follow the findings of recent research on this matter.
I had written the above paragraph in the first edition of my book on reverse mortgages (page 72). So it goes with government-administered programs; financial planners use their acumen to find uses and strategies that government policymakers do not anticipate.
It happened with Social Security in November 2015, when sophisticated claim strategies were phased out in response to financial planners catching on about how to obtain additional spousal benefits.
And then it happened following a series of rule changes to the reverse mortgage program in October 2017. Based on a series of articles published in the Journal of Financial Planning since 2012, financial planners saw how setting up a growing line of credit with the home equity conversion mortgage (HECM) program offered invaluable options for building more efficient retirement-income plans. The rule changes throttled the value of those strategies.
The updated rules about this prompted a need to write a second edition for my book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement, sooner than I expected. That second edition was released earlier this year and is available from the link on this page.
For those who initiated reverse mortgages prior to rule change, the old rules still apply. However, the situation changed significantly for new loans after that date.
Where do we stand one year removed from these changes?
Overview of the rule changes
The new HECM rules reduced some of the momentum and value from reverse-mortgage line of credit uses. Under the new regime, it is a tougher psychological hurdle to open a reverse mortgage before it is needed in order to begin the line of credit growth process. Up-front costs are higher with the increased initial mortgage-insurance premium, and the line of credit now grows more slowly due to a smaller ongoing mortgage insurance premium. More specifically, the new reverse-mortgage rules include:
- The initial-mortgage insurance premium when opening a reverse mortgage is now 2% of the home value up to the $679,650 (as of January 1, 2018, and subject to change) lending limit. This has changed from a previous dueling-premium approach that depended on the amount borrowed in the first year; it was 0.5% if less than 60% of the allowed borrowing amount was taken in the first year and 2.5% if more than 60% of the allowed borrowing amount was taken in the first year.
- The ongoing mortgage-insurance premium on the loan balance has been reduced to 0.5% from the previous 1.25%.
- A new table of principal-limit factors was issued, and these generally result in a reduced initial borrowing amount with the reverse mortgage, at least when interest rates are low.
- The floor on the expected rate used to calculate initial borrowing amounts on a reverse mortgage was reduced from 5.06% to 3%, which does have some interesting implications in our low-interest-rate environment.
Read the full article here by Wade Pfau, Ph.D., CFA, Advisor Perspectives