Kamis, 26 Maret 2009

Home Equity Conversion Mortgage, or Reverse Mortgage, Line of Credit Strategy

A Home Equity Conversion Mortgage, Or Reverse Mortgage, was once thought of a product of last resort for Seniors needing a safety net or lifeline. When I first heard of Reverse Mortgages,I was negative on the concept as well. But gradually, I became a believer as the myths were debunked and the product has evolved to the excellent option it is today. I have seen first-hand what the product can do for the lives of those affected. I don’t know how many times I have people say to me “I wish I could get a Reverse Mortgage”, but couldn’t because they don’t meet the age requirement. Reverses are now becoming more accepted and more mainstream, even with those that do not have an immediate financial need. Below, I will explain why it makes sense for anyone who is eligible, age and equity-wise, to consider a Home Equity Conversion Mortgage Line of Credit, even if there is no pressing financial need.

A Reverse Mortgage Line of Credit, also known as a HECM LOC, is a wise financial strategy for anyone who can qualify for one. You see, a HECM LOC costs the borrower nothing to have this vehicle set aside and in place should a financial need or emergency arise. Also, a HECM LOC has an annual growth rate attached to it, that can greatly benefit the borrower.

Let’s say a hypothetical couple, we’ll call them Don and Mary, age 65, have a home that is paid for. The Current Market Value of the home is $200,000. Don and Mary worked hard their entire lives, and with Social Security, 401K’s savings, and small pensions, are doing quite well. They are able to manage their bills, and take care of the little emergencies that come up. Don has talked to his Insurance agent, and his agent has recommended Long Term care Insurance now, while they are still young and healthy. In the next 10 years, should either get sick, or at the very least even test positive for say Type II Diabetes, this could make them “uninsurable” or cause an Increase in their rates. They are doing quite well, but worry about the future and possible health events that could put a dent in their finances, or cause them to even lose their home. But Don is reluctant to spend $400-$500 per month for something that he might not ever use or need, and has little or no cash value at the end. Their finances have taken a hit with the economy, and everything from taxes to utilities, to day to day living seem to be putting a squeeze on them. Let me show you how a HECM LOC could help them pay for this Insurance at little or no cost to them, or add about $4200 a year in income to their household budget.

See, with a Reverse Mortgage, proceeds can be taken in a Line of Credit, or a Credit Line. In this case, Don and Mary could take a Reverse Mortgage out for approximately $120,000. A Reverse Mortgage Line of Credit has what is called a Growth Rate attached to it, which is ½% more than the rate on the Reverse Mortgage. Don and Mary left all theirs in the Credit Line option, so they don’t owe anything on the Reverse Mortgage yet? No, their closing costs and Monthly set aside servicing fee are part of the reverse Mortgage when they closed the loan. These are accruing interest at a rate ½ percent less than they credit line growth rate. Today, as of Feb 2008, this is accruing at about 3.04%. The Credit Line Growth rate would be 3.54% in this example. But remember, the closing costs are financed on the back end of the Reverse Mortgage, and are not due until the home is sold. Let’s say the closing costs and Service set aside the first year are $10,000, so at the end of year 1, the Reverse Mortgage has a balance of $10,300. The Credit Line now has $124,200 balance. Don and Mary can withdraw the $4200,

And use these funds to pay for their Long-term Care Insurance, taxes, vacation, or whatever they want, all while maintaining their HECM LOC of $120,000 for the future.

The $4200 now becomes part of the Reverse Mortgage. It is Important to note that the Credit Line Growth is not Interest, but Credit Line Growth that can be utilized. Also, the full $120,000 line of credit is available, should they need it , in the future.

Don’t forget that they still have about $68,700 in Equity remaining in their home, assuming their home appreciated at a 4% rate. Even with the recent decline in some home prices, it is reasonable to expect a moderately valued home, like the one in this example, while maybe experiencing some fluctuations, will continue to appreciate. Our Government continues to Invest heavily in Mortgage-backed securities. They can continue to do this monthly, or annually, however they wish, while still maintaining an equity cushion. Wouldn’t we all like to have this option? I wish I had a source where I could do this, or better yet, borrow up to $120,000 if needed, at about 3% Interest, without having to make payments on it, should I need it.!

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