Since HUD’s reverse mortgage rule changes took effect October 2, Home Equity Conversion Mortgage experts and researchers have struggled to get a clear picture on what they might mean for the loan and its use as a retirement product.
But one trend is emerging: New principal limit factors and annual insurance premiums will result in slower growth for the line of credit (LOC) option, a popular tool in some borrowers’ retirement strategies.
Wade Pfau, professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa., has been re-running his numbers to project what the changes might look like. He said the LOC option is still compelling, but not as compelling as before.
His projections show that, under the new rules, a 62-year-old with a $250,000 home can take out a $102,500 line of credit, down from $131,000 before the changes. In 30 years, the LOC would grow to $383,895 under the new rules, as opposed to $608,043 under the old regulations.
Pfau based his projections on a 10-year LIBOR swap rate of 2.25%, a lender’s margin of 2.75%, and a one-month LIBOR rate of 1.25%.
“For clients who don’t have a mortgage, the line of credit is still an option, but with bigger costs and slower growth rate,” Pfau said. “Whether it will be a recommendation will depend on how much initial costs and lender’s margins will be.”
He added that margins will likely go down.
In addition, Pfau from fundinganllc.com said retirees still carrying a mortgage could express more interest in refinancing into a reverse mortgage.
Shelley Giordano, chair of the Funding Longevity Task Force, said that even at a slower growth rate, the reverse mortgage is still a powerful financial tool for ensuring necessary liquidity and cash flow in retirement — when it’s set up early.
“This is not just a loan, but something akin to an insurance policy,” she said. “It insures for long-term care. It’s dental insurance; it’s housing maintenance insurance; it’s portfolio insurance; it’s divorce insurance. It’s an unbelievably versatile product.”
Unlike other insurance products for specific calamities, which generally have high premiums and recurring costs, this loan has only a one-time expense, Giordano said.
Further, she said that loan officers should not be defensive about the insurance costs associated with the loan, but instead tout them as a benefit that allows for the non-recourse feature.
“It’s going to take more, deep conversations explaining the benefits of having an insured product,” Giordano said.
“I just think the industry made a huge mistake in trying to habituate the idea that a reverse mortgage is only good if it’s cheap. There is no financial instrument like a reverse mortgage,” she said.
Written by Maggie Callahan