Mortgage Professor: The Time is Now for a Reverse Mortgage

The HECM reverse mortgage program can play a key role in helping Americans who qualify to avoid outliving their savings in retirement.

But the time to act is now, says “The Mortgage Professor,” a.k.a Jack Guttentag, in a recent article, noting the current low interest rate environment. 

“A favorite planning tactic [of financial planners] is to calculate an annual asset liquidation plan that is consistent with a target probability of running out – 3 to 4% are numbers I have seen,” writes X, a.k.a The Mortgage Professor. “The problem is that a 3-4% probability of becoming impoverished at an advanced age is not acceptable to many if not most seniors. “

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A HECM reverse mortgage program generates an income stream that becomes larger the longer the borrower lives, he advises, noting that “it is urgent to act now because the window for doing these deals will begin to close when interest rates begin their inevitable rise.”

The size of the initial HECM credit lines that can be drawn are inversely related to interest rates, while the growth rate of existing unused lines is directly related to rates.

“Hence, a senior with a specified amount of equity gets the maximum insurance coverage by taking out the HECM while interest rates are still low, and letting it sit unused as rates rise in the future,” he says.

In fact, interest rates have a much larger impact on the initial credit line a senior can command than his age.

“The senior of 62 with $200,000 of equity in his home can command an initial credit line of $97,800 at the current rate of 5%,” he says. “If he waits for interest rates to begin their inevitable rise, the credit line will drop precipitously. At 10%, the initial line available to the same borrower would be $19,000, or 80% less. A borrower of 92 at 10%  cannot command as large a line as a borrower of 62 at 5%.”

Read the article here.

Written by Cassandra Dowell

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  • Many industry veterans claim that an unused line of credit has the potential to grow beyond the initial value of the home. $200,000, in the Mortgage Professor’s example, can grow to amounts ranging from $618,200 to $2,650,400 as described in the article’s Table 2. depending upon the interest rate.

    For anyone, this is a truly compelling scenario. However HUD policy states that a lender is not secured for payments to the borrower beyond the maximum claim amount or 150% of the maximum claim amount, which, in the Mortgage Professor’s example would drop the gross line of credit down to $200,000 or $300,000 (less the unpaid balance). Loan agreements have a stated maximum loan amount that is based on the MCA.

    That said, is there a lender who will make unsecured payments
    to the borrower? Or, would a draw that causes the loan balance to exceed the original loan amount require a modification to the loan agreement; perhaps resulting in a new appraisal to determine if the home’s value is sufficient to secure the debt?

    • No modification required, this is part of what the mortgage insurance pays for in guaranteeing the loan terms. A lender has recourse to the property PLUS the mortgage insurance up to the MCA so even a loan that goes over MCA is still protected. It’s not the lender’s preferred course since a loan over 100% can’t be assigned to FHA to offset some of the funding risks, etc. but the borrower still gets the benefit.

    • This is now the third time you’ve made a similar comment in the past week. I have seen nothing confirming that a HECM LOC is limited to the max claim amount, 150% of the MCA, or any fixed amount for that matter. You had me worried that I was misinforming my past clientele.

      P.S. – this is a good example of why this site should require real names to post.

  • Missing an important point, for those who choose a credit line with their reverse mortgage, when interest rates rise in the future, their credit line compounds faster. At 4%, a $100k credit line increases to $148k in 10 years and at 5%, it increases to almost$163k, almost 31% more.

    • Ray,

      Your math is off.

      When the interest rate is 4%, the growth rate is 5.25% as the growth rate is 6.25% when the interest rate is 5%. Thus your $148K should be $168.8K and your $163K should be $186.5K. Also make sure your are compounding the growth rate monthly.

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