Why Retirees With Existing Mortgages Should Take a HECM Reverse Mortgage
Comparing Retirement Options
I illustrate the case for taking a HECM with a woman of 62 whose home is worth $500,000, has an existing mortgage balance of $200,000 on which she is paying $1051 a month at 3%, and $250,000 of financial assets earning a return of 6%. The table shows spendable funds during her retirement years on 4 options if she pays off the mortgage, and under 2 options if she doesn’t.
The principal conclusion is that this retiree will enjoy
more spendable funds if she takes out a HECM. I have not
found any plausible combination of retiree-based features in
which this conclusion does not hold. Readers who might wish
to check it can do so using the spreadsheet
You Pay Off Your Mortgage at Retirement?
hould You Pay Off Your Mortgage at Retirement?
The Best Option For Retirees
As shown in the table, the indebted retiree who wants the maximum spendable funds during retirement will take out a HECM credit line, pay off the mortgage, and purchase an annuity with deferred payments (I assume a 10-year deferment). With this option, the credit line and the retiree’s financial assets are allocated between the annuity amount and draws on the credit line such that the line is exhausted when the annuity kicks in. The spendable funds provided are markedly higher than on any of the other options, with or without mortgage payoff.
The Second-Best Option For Retirees
The second-best option is a HECM tenure payment which is similar to an annuity, but with some differences. The largest difference is that the annuity payment is about 40% larger. In addition, annuities continue until death whereas tenure payments cease if the house is sold or the retiree moves out of it permanently – to a nursing home, for example. Nonetheless, the second-best option has been selected by many retirees while to my knowledge the best option has not been selected by any.
Why the Best Option is Not Selected
While the HECM tenure payment option can be provided by any advisor authorized to provide HECMs, the HECM/annuity combination can be provided only by firms that can deliver both HECMs and annuities. This has been prevented by legal restrictions designed to protect borrowers from being exploited by collusive arrangements between HECM lenders and annuity providers.
But this onerous provision contains an escape hatch: a system of safeguards or firewalls that ensure that HECM originators have no financial incentive to direct annuities to their borrowers, impose no requirements on borrowers to purchase annuities, and cannot collude to set prices. Until now, however, the escape hatch has not been used.
Barrier to the Development of an Escape Hatch
While HECM lenders and annuity providers would both gain from acquisition of the capacity to combine HECMs with annuities, developing safeguards that comply with the law would be difficult, if not impossible, for either.
A system developed by Mortgage Professor LLC (MP), following extensive consultation with counsel, meets all the requirements of Section 255(n), and more so. Here is how it works.
Advisors are licensed mortgage brokers certified by MP as proficient in retirement plan analytics. They are termed “Reverse Mortgage Integrators” or RMIs.
In developing a retirement plan, the RMI accesses two networks maintained by MP, covering HECM prices and annuity prices.
The annuity prices used in the plan are selected by the network as the best of those included in MP’s annuity price network. The RMI has no discretion in selecting the insurer and can change it only if the client requests it.
RMIs are paid by the lender while MP is paid by the insurer.
At this writing, there are only a few RMIs but more will emerge in coming months as retirees and other financial advisors become aware of the potential.
The author is chairman of Mortgage Professor LLC, which developed the safe-guard system described here, and which would profit from its implementation.