Reverse mortgage credit lines are becoming more and more attractive to younger borrowers amid the specter of rising interest rates, a Wall Street Journal article published today claims.
The story features quotes from multiple financial advisors and retirement experts extolling the virtues of taking out a home equity conversion mortgage line of credit as early as possible to hedge against future fluctuations in the stock market, home prices, and interest rates.
The WSJ cites research from brothers Barry H. and Stephen R. Sacks — a tax attorney and a retired economics professor, respectively — which recommends that borrowers use their lines of credit to weather down stock markets, allowing time for their investments to grow and preventing significant interruptions in lifestyle. This strategy improved the borrower’s chances of retaining wealth into old age, the Journal reported.
The Journal notes multiple potential downsides to the HECM line of credit, advising readers that the origination fees — giving an example of $9,000 on a credit line of approximately $200,000 — make it a less desirable short-term option. The paper also provides the often-mentioned caution about the potential lack of inheritance for the borrower’s heirs.
But overall, the Journal strikes a positive tone about the use of HECM credit lines, ending with this quote from Jamie Hopkins, an associate professor of taxation at the American College of Financial Services: “If home equity is incorporated more strategically in the future, we will see vast improvements in the financial security of retirees.”
Read the full Wall Street Journal piece here.
Written by Alex Spanko
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The author writes: “A reverse mortgage is a type of loan taken against equity in a home…. It requires no monthly payments, with interest charges instead added to the loan balance and paid only after the homeowner sells or dies.”
A reverse mortgage is not taken against the equity in the home. All loans against the home must be paid off with the closing of the reverse mortgage. So as to priority a reverse mortgage is a first lien, not a second or higher number such lien.
Yet the author writes: “But over many years, the credit line … grows each year by the current interest rate on the loan plus 1.25 percentage points, which is the loan’s annual mortgage-insurance charge.” So when it comes to the line of credit, both interest and the ongoing MIP increase the line of credit but as stated in the first quotation, only interest increases the balance due. Yet it is clear the line of credit they are addressing is a HECM LOC but not the balance due?
Ya gotta hand it to these guys, they are really clever, no MIP on the balance due but there is MIP in the growth rate. Can someone tell me where to get this particular type of reverse mortgage?
Then we come to the tenure payout at age 82. Without telling us the expected interest rate, they conclude that the tenure payout at 82 will be “nearly $5,000” per month if the available line of credit is allowed to grow without any draws but that is only true if the expected interest rate was at least 5.54%. (The author computes the available line of credit to be “more than $600,000” when the borrower is 82 but it is more like $625,750.) Unfortunately at 5.54% the principal limit factor could only be 0.459% which on a MCA of $400,000 would be a principal limit of just $183,600 which is lower than the net principal limit used in the example of $200,668.
The article as a whole lacks substance and needs correction with better disclosure. The industry needs better writers if our statements about the HECM Line of Credit are to hold up and have sufficient credibility.