A Retirement Tool

More and more financial advisors are recommending the reverse mortgage program to homeowners age 62 and older as a successful retirement planning tool. Here are two ways the line of credit works best as a retirement planning strategy.

Here’s an example of a couple who got their line of credit at age 62 and didn’t access their available funds until 10 years later:**

Mark and Sue are 62 years old and own a home that is worth $300,000. Their home is paid off so there’s no existing mortgage balance. At their current age, they qualify for reverse mortgage line of credit for approximately $149,700. Since Mark and Sue do not need money right now, they simply pay their closing costs to open the line of credit and do not take any of the $149,700. Since the line of credit sits untouched with no withdrawals for ten years, the $149,700 increases in value during that time. At age 72, the home value is projected to be $407,976 based on a projected home price appreciation of 3.475% over the ten-year period based on Moody’s Analytics.

When Mark and Sue are 72 and want to draw money from their line of credit, they will have about $330,877 waiting for them. This is more than double the amount available at the time the line was started. During the 10 years the line was not used, their available funds grew in value by approximately $181,177.

So how does the line of credit grow?

Getting older isn’t something most people like. However, with a reverse mortgage line of credit, the money available in your credit line grows as you grow older.

To figure out your borrowing potential, we use your interest rate plus your mortgage insurance premium (MIP). This is considered your “growth rate.” The unused line of credit grows at the growth rate, which is the same rate that is applied to your outstanding balance to calculate your interest and MIP each month. Your growth rate predicts how much money you will have available in the future. Remember, this is a line of credit, so the rate can change. There are three components to determine the growth rate: 1) the current index value 2) the margin and 3) since this line of credit product is insured, it also includes a 1.250% annual MIP which is paid to FHA. In the case of Mark and Sue, their initial growth rate is 5.853% and equates as follows:

Index 1.728%
Margin 2.875%
MIP 1.250%
Growth Rate 5.853%

Now that we have the initial growth rate, we need to determine the average growth rate over 10 years. We use Moody’s Analytics to determine the projected growth rate, and then we average it over 10 years. Mark and Sue’s average growth rate is 8.025%. The $149,700 is compounded monthly by the average growth rate of 8.025% to determine the estimated amount of money 10 years after the line is started. For Mark and Sue, this equates to approximately $330,877 of available funds when they are age 72.**

While there is interest and ongoing MIP associated with a small unpaid balance and upfront closing costs, in the end, it is worth it. The growth occurs yearly and compounds over time delivering a much larger amount of available funds that can be accessed at any time and used for anything.

*Please consult your financial advisor.

**Sample hypothetical scenario is for our HECM Annual reverse mortgage and is based on the 1-Year LIBOR index as of 6-13-2017. The index can change at any time. The Annual Percentage Rate (APR) is 6%. Initial MIP is 0.5 % if borrower does not exceed 60% of Principal Limit. Estimated origination fee, closing costs and mortgage insurance premium $7,500. The unused line of credit funds will compound at the current market growth rate throughout the life of the loan. Results may vary. Proof of proper and adequate insurance may be required prior to close.

The interest rate is variable and may change subject to a 2% limit at any one time and it will never increase by more than 5% (Lifetime cap).

We used Moody’s Analytics to derive the future interest rates and home price appreciation.

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