Self insure for LTC using Reverse Mortgage HECM?

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SuzBanyan
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Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 1:13 pm

For a couple about to enter retirement with no mortgage on our primary home, does a HECM reverse mortgage make sense as "insurance" against the cost of LTC for the first spouse to need such care?

Home value is slightly over $625,000, which means that the year 2 line of credit would be as about $316k, rising to $513k by year 10 (depending on interest rates). This is based on a couple with a current age of 58/67.

The fees for the RM would be about $12K, which could be paid out of other assets to keep the LOC as high as possible.

If we stay in the home until death and never need to draw on the line, then the $12K in fees was "wasted" except to the extent it helped us sleep better at night (and hence, why I called it "insurance").

The fee would truly one be "wasted" if we sold the house either before needing LTC or as a result of the first spouse needing LTC (due, for example, relocating to a different area to obtain needed care).

Anyone used this strategy?

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whaleknives
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Fri Jul 29, 2016 2:59 pm

I've never had an HECM, but I've looked into them for future planning, and I'm curious about your numbers. Are they based on a quote?

The National Reverse Mortgage Lenders Association calculator ("for illustrative purposes only") gave me net loan limits ranging from 51% of home value for a younger owner of age 65, to 71% for age 95.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by bobcat2 » Fri Jul 29, 2016 3:29 pm

See these earlier threads for discussions of paying for LTC in general and using reverse mortgages to pay for LTC in particular.

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=176479&p=2669010&hilit=long+term+care#p2669010

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=172321&hilit=reverse+mortgage

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ResearchMed
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by ResearchMed » Fri Jul 29, 2016 3:45 pm

SuzBanyan wrote:For a couple about to enter retirement with no mortgage on our primary home, does a HECM reverse mortgage make sense as "insurance" against the cost of LTC for the first spouse to need such care?

Home value is slightly over $625,000, which means that the year 2 line of credit would be as about $316k, rising to $513k by year 10 (depending on interest rates). This is based on a couple with a current age of 58/67.

The fees for the RM would be about $12K, which could be paid out of other assets to keep the LOC as high as possible.

If we stay in the home until death and never need to draw on the line, then the $12K in fees was "wasted" except to the extent it helped us sleep better at night (and hence, why I called it "insurance").

The fee would truly one be "wasted" if we sold the house either before needing LTC or as a result of the first spouse needing LTC (due, for example, relocating to a different area to obtain needed care).

Anyone used this strategy?


Is there an advantage to taking out the Reverse Mortgage at a time that is probably far in advance of when it would be needed?
If not, then why not save those fees, in case, for example, you sell the house and use the money instead?

I don't think there are any income requirements for a Reverse Mortgage, except to show "living expenses including insurance, taxes, maintenance, or whatever", so the property isn't likely to fall into disrepair, and to minimize the chance of needing to foreclose.

We will probably eventually look into this, but there is also a fairly good chance that we'd have sold before or at the time LTC was needed.
The stairs are likely to become a problem by then, and perhaps before actual LTC is needed.

We'd be eager to hear whatever else others can add to this topic.

RM
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 4:10 pm

whaleknives wrote:I've never had an HECM, but I've looked into them for future planning, and I'm curious about your numbers. Are they based on a quote?

The National Reverse Mortgage Lenders Association calculator ("for illustrative purposes only") gave me net loan limits ranging from 51% of home value for a younger owner of age 65, to 71% for age 95.

I used http://rmc.ibisreverse.com for an estimate based on current interest rates. As I understand, for the line of credit option, the available credit increases each year based on the calculated interest rate (for example, libor plus the lender's margin of 2.75%, might be 4% each year after year 2). As a result, the amount available increases annually.
Last edited by SuzBanyan on Sun Jul 31, 2016 12:04 pm, edited 1 time in total.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 4:12 pm

bobcat2 wrote:See these earlier threads for discussions of paying for LTC in general and using reverse mortgages to pay for LTC in particular.

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=176479&p=2669010&hilit=long+term+care#p2669010

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=172321&hilit=reverse+mortgage

BobK

Bob: Thank you for posting these links. I had searched the forums before I posted and found a number of your posts on the subject, all very helpful.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by stlrick » Fri Jul 29, 2016 4:15 pm

ResearchMed wrote: Is there an advantage to taking out the Reverse Mortgage at a time that is probably far in advance of when it would be needed? If not, then why not save those fees, in case, for example, you sell the house and use the money instead?


Wade Pfau argues that there are good reasons to take out a reverse mortgage as early as possible:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685816

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whaleknives
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Fri Jul 29, 2016 4:24 pm

SuzBanyan wrote:
whaleknives wrote:I've never had an HECM, but I've looked into them for future planning, and I'm curious about your numbers. Are they based on a quote?
The National Reverse Mortgage Lenders Association calculator ("for illustrative purposes only") gave me net loan limits ranging from 51% of home value for a younger owner of age 65, to 71% for age 95.

I used http://rmc.ibisreverse.com for an estimate based on current interest rates. As I understand, for the line of credit option, the available credit increases each year based on the calculated interest rate (for example, libor plus the lender's margin of 2.75%, might be 4% each year after year 2). As a result, the amount available increases annually.

The Ibis calculator input is similar, but instead of you taking cash or an income stream immediately, you seem to be loaning the mortgage amount to the lender until you start withdrawing on your line of credit, which is why the future amounts can be higher.
Last edited by whaleknives on Fri Jul 29, 2016 4:32 pm, edited 1 time in total.
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Phineas J. Whoopee
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by Phineas J. Whoopee » Fri Jul 29, 2016 4:29 pm

It is not a good idea. The reverse mortgage balance, including accumulated interest, becomes due and payable after the borrower, or both if it's couple, has not lived in the house for the past twelve months, in the sense of physically residing there, not just receiving mail. It won't work well for a long stay in a nursing home, which presumably is what's being "self insured" against. Time in the hospital prior to nursing home admission counts toward the twelve months of being nonresident.

The Department of Housing and Urban Development wrote:...
Principal Residency Status:

The borrower must maintain his/her principal residence in the property securing the HECM loan. He/she may not leave the property for more than 12 months.
Note: A borrower may have only one principal residence.
...

None of this is to say an ordinary, non-reverse mortgage home equity line of credit couldn't be a good choice. It might well be under certain circumstances, and depending on the terms.

PJW

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 4:36 pm

ResearchMed wrote:
Is there an advantage to taking out the Reverse Mortgage at a time that is probably far in advance of when it would be needed?
If not, then why not save those fees, in case, for example, you sell the house and use the money instead?

I don't think there are any income requirements for a Reverse Mortgage, except to show "living expenses including insurance, taxes, maintenance, or whatever", so the property isn't likely to fall into disrepair, and to minimize the chance of needing to foreclose.

We will probably eventually look into this, but there is also a fairly good chance that we'd have sold before or at the time LTC was needed.
The stairs are likely to become a problem by then, and perhaps before actual LTC is needed.

We'd be eager to hear whatever else others can add to this topic.

RM

You may be right that it would make sense to wait. We will probably wait until we are both 62, so that I am not a "non-borrowing spouse" who would not be able to draw on the line in the event of my husband's death (although current rules allow me to stay in the house).

Some factors which suggest earlier might be better:

1. Reverse mortgages are currently much more expensive if you need to pull 60% of the available funds in the first year (the initial fees go up by 2% of the home value). Better to get it a year before you need it (although most Bogleheads could probably fund a years worth of cost from other sources).

2. They interest rates are expensive in a low interest rate environment (5% variable or more). Getting the line set up then, however, does cap you ultimate rate higher than if you wait until interest rates are higher.

3. The annual credit line increase means the sooner you set it up, the higher the line. This may be something of a wash, however, because the line will start lower with younger borrowers.

4. The market value of you home could decline from its value today, which would make the starting line lower. Note that if your current home value is at or above $625,500, there is no corresponding possibility of an increase in the market value giving you access to a larger value, unless the rules change.

5. The rules could change making a new reserve mortgage less attractive.

I compared a reverse mortgage with LTCi for a couple (which might start at $6k for a 3year benefit for each person with a total value of $330K). The 12k in fees for a $330k line of credit looked like a reasonable possibility, although it obviously spends down home equity, which the insurance payout would not.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 4:39 pm

Phineas J. Whoopee wrote:It is not a good idea. The reverse mortgage balance, including accumulated interest, becomes due and payable after the borrower, or both if it's couple, has not lived in the house for the past twelve months, in the sense of physically residing there, not just receiving mail. It won't work well for a long stay in a nursing home, which presumably is what's being "self insured" against. Time in the hospital prior to nursing home admission counts toward the twelve months of being nonresident.

The Department of Housing and Urban Development wrote:...
Principal Residency Status:

The borrower must maintain his/her principal residence in the property securing the HECM loan. He/she may not leave the property for more than 12 months.
Note: A borrower may have only one principal residence.
...

None of this is to say an ordinary, non-reverse mortgage home equity line of credit couldn't be a good choice. It might well be under certain circumstances, and depending on the terms.

PJW

It only "insures" against the first spouse to need care outside the home. You are right, for someone single or for the second spouse to need care outside the home, it provides no benefit.

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celia
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by celia » Fri Jul 29, 2016 4:40 pm

ResearchMed wrote:Is there an advantage to taking out the Reverse Mortgage at a time that is probably far in advance of when it would be needed?
If not, then why not save those fees, in case, for example, you sell the house and use the money instead?

I also recommend not taking out the reverse mortgage until the LTC money is needed. Don't you pay (owe) interest on the amount loaned once you receive it?

You may not even need LTC. You may move before needing it. You could die before needing it. So why waste your time and money on it until you need it? The value of your house can also go up between now and then, qualifying you for more.

And if one of you needs LTC and it looks like the other will need it a year or two later, it would make more sense to sell the house instead.

In case you DO need it one day, it would be good to plan now to rely on trusted relatives to help you obtain it (your executor/trustee), especially since memory issues can crop up as you get older. Why not talk to them NOW about what you think the best plan is at this time? Use this as an opportunity to educate them and to learn their opinions (on something you might not have considered) so they can later speak up for you as they will then understand what you want. Hopefully they will keep their ears and eyes open about reverse mortgages between now and then and continue to discuss it with you over time.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 5:00 pm

celia wrote:
ResearchMed wrote:Is there an advantage to taking out the Reverse Mortgage at a time that is probably far in advance of when it would be needed?
If not, then why not save those fees, in case, for example, you sell the house and use the money instead?

I also recommend not taking out the reverse mortgage until the LTC money is needed. Don't you pay (owe) interest on the amount loaned once you receive it?

--snip--

There is no interest accruing until you actual use the HECM. If you pay the upfront closing costs from other assets, the balance remains 0 until you make a loan draw.

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Phineas J. Whoopee
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by Phineas J. Whoopee » Fri Jul 29, 2016 5:02 pm

SuzBanyan wrote:...
It only "insures" against the first spouse to need care outside the home. You are right, for someone single or for the second spouse to need care outside the home, it provides no benefit.

Nor very much for the first if both spouses start needing care at around the same time. Maybe I'm reacting too much to the word insure, but I'd want my plan to cover the bad sequences, not just the good ones. Everyone decides how much risk to take.
PJW

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 5:23 pm

Phineas J. Whoopee wrote:
SuzBanyan wrote:...
It only "insures" against the first spouse to need care outside the home. You are right, for someone single or for the second spouse to need care outside the home, it provides no benefit.

Nor very much for the first if both spouses start needing care at around the same time. Maybe I'm reacting too much to the word insure, but I'd want my plan to cover the bad sequences, not just the good ones. Everyone decides how much risk to take.
PJW

While it does not cover all "bad sequences", it does cover one that can be especially troubling: the cost of out of home care for one spouse while the other wants to continue to live at home.

Under such a scenario, a couple is now supporting two homes and the second home/care can cost $100k per year. Over many years, this can deplete the assets available for the healthy spouse, thus forcing that spouse to move sooner than otherwise desired. This taps the home equity for the benefit of the ailing spouse without increasing the costs to the healthy spouse (unlike a standard line of credit). In addition, the amount available may be greater than the home value.

If both spouses move simultaneously to LTC, the home value would be available to pay for care of both as the home can be sold.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Fri Jul 29, 2016 5:35 pm

SuzBanyan wrote:. . .There is no interest accruing until you actual use the HECM. If you pay the upfront closing costs from other assets, the balance remains 0 until you make a loan draw.

There is never any interest payment, because the lender has included it in the mortgage fees. This is why only 50-70% of the home value is available to the owner.

In the meantime, the lender is selling or investing the entire home value, because you have mortgaged it, even if you're not drawing from the line of credit.

    "It is called a “reverse” mortgage because, instead of making payments to the lender, you receive money from the lender. The money you receive, and the interest charged on the loan, increase the balance of your loan each month. Over time, the loan amount grows. Since equity is the value of your home minus any loans, you have less and less equity in your home as your loan balance increases."
    http://www.consumerfinance.gov/askcfpb/224/what-is-a-reverse-mortgage.html
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 5:59 pm

whaleknives wrote:
SuzBanyan wrote:. . .There is no interest accruing until you actual use the HECM. If you pay the upfront closing costs from other assets, the balance remains 0 until you make a loan draw.

There is never any interest payment, because the lender has included it in the mortgage fees. This is why only 50-70% of the home value is available to the owner.

In the meantime, the lender is selling or investing the entire home value, because you have mortgaged it, even if you're not drawing from the line of credit.

I'm not following you.

Let's say I have a HECM with a line of credit of $330K and a current balance of $0. If I sell the home tomorrow, my net proceeds equal sales price minus closing costs minus $0 balance on my HECM.

When you write that 'the lender is selling or investing the entire home value" are you suggesting the the lender would sell the right to collect on the note while retaining the obligation to make advances under the line of credit? I would think that the difficulty in estimating the balance which might be due years in the future -- remember the amount of the line of credit increases annually by a variable amount and can exceed the total home value -- makes this unlikely. How much would an investor pay today to receive an amount between 0 and the value of my home at some point in the future and how much would the lender need to receive today to be willing to advance between 0 and an amount in excess of my home value over a multi-year period?

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whaleknives
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Fri Jul 29, 2016 6:21 pm

SuzBanyan wrote:. . .I'm not following you.

Let's say I have a HECM with a line of credit of $330K and a current balance of $0. If I sell the home tomorrow, my net proceeds equal sales price minus closing costs minus $0 balance on my HECM.

When you write that 'the lender is selling or investing the entire home value" are you suggesting the the lender would sell the right to collect on the note while retaining the obligation to make advances under the line of credit? I would think that the difficulty in estimating the balance which might be due years in the future -- remember the amount of the line of credit increases annually by a variable amount and can exceed the total home value -- makes this unlikely. How much would an investor pay today to receive an amount between 0 and the value of my home at some point in the future and how much would the lender need to receive today to be willing to advance between 0 and an amount in excess of my home value over a multi-year period?


It's not clear to me from the calculators and the articles I've read when the lender costs below come due (emphasis added). If you're treating the $12,000 in fees as covered by other assets and written off as insurance, you may be correct. But I think the lender can reduce your equity, even if you do not draw on your line of credit, for expenses like the FHA insurance, for the life of the HECM. Once you close on the HECM, the expenses exist.

    "HECM Costs
    You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.

    The HECM loan includes several fees and charges, which includes: 1) mortgage insurance premiums (initial and annual) 2) third party charges 3) origination fee 4) interest and 5) servicing fees. The lender will discuss which fees and charges are mandatory.

    You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.

    Mortgage Insurance Premium
    You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.

    Third Party Charges
    Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

    Origination Fee
    You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

    Servicing Fee
    Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate."
    FHA Reverse Mortgages (HECMs) for Seniors

On the subject of reselling the HECM, proprietary reverse mortgages are described as not as common as HECMs because they lack a secondary market for lenders, and cannot be easily secured by sale to Fannie Mae and Freddie Mac. (Investopedia, "Proprietary Reverse Mortgage", retrieved July 23, 2016) What discount the lender uses in reselling would depend on your particular circumstances, but the HECM could be sold.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 6:44 pm

whaleknives wrote:
SuzBanyan wrote:. . .I'm not following you.

Let's say I have a HECM with a line of credit of $330K and a current balance of $0. If I sell the home tomorrow, my net proceeds equal sales price minus closing costs minus $0 balance on my HECM.

When you write that 'the lender is selling or investing the entire home value" are you suggesting the the lender would sell the right to collect on the note while retaining the obligation to make advances under the line of credit? I would think that the difficulty in estimating the balance which might be due years in the future -- remember the amount of the line of credit increases annually by a variable amount and can exceed the total home value -- makes this unlikely. How much would an investor pay today to receive an amount between 0 and the value of my home at some point in the future and how much would the lender need to receive today to be willing to advance between 0 and an amount in excess of my home value over a multi-year period?


It's not clear to me from the calculators and the articles I've read when the lender costs below come due (emphasis added). If you're treating the $12,000 in fees as covered by other assets and written off as insurance, you may be correct. But I think the lender can reduce your equity, even if you do not draw on your line of credit, for expenses like the FHA insurance, for the life of the HECM. Once you close on the HECM, the expenses exist.

    "HECM Costs
    You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.

    The HECM loan includes several fees and charges, which includes: 1) mortgage insurance premiums (initial and annual) 2) third party charges 3) origination fee 4) interest and 5) servicing fees. The lender will discuss which fees and charges are mandatory.

    You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.

    Mortgage Insurance Premium
    You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.

    Third Party Charges
    Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

    Origination Fee
    You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

    Servicing Fee
    Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate."
    FHA Reverse Mortgages (HECMs) for Seniors

On the subject of reselling the HECM, proprietary reverse mortgages are described as not as common as HECMs because they lack a secondary market for lenders, and cannot be easily secured by sale to Fannie Mae and Freddie Mac. (Investopedia, "Proprietary Reverse Mortgage", retrieved July 23, 2016) What discount the lender uses in reselling would depend on your particular circumstances, but the HECM could be sold.

Got it!

If a homeowner does not plan to draw on the HECM until years in the future, the better option would be to use a lender which includes the loan servicing fee in the mortgage interest rate. I believe this option is common, but have not personally verified it.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Fri Jul 29, 2016 6:56 pm

SuzBanyan wrote:. . . Got it!
If a homeowner does not plan to draw on the HECM until years in the future, the better option would be to use a lender which includes the loan servicing fee in the mortgage interest rate. I believe this option is common, but have not personally verified it.

I'm glad you do, but the more I look into it, the less certain I am. I just keep reminding myself that there's no such thing as a free HECM, and the costs come out of your equity. :D
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Fri Jul 29, 2016 7:01 pm

whaleknives wrote:
SuzBanyan wrote:. . . Got it!
If a homeowner does not plan to draw on the HECM until years in the future, the better option would be to use a lender which includes the loan servicing fee in the mortgage interest rate. I believe this option is common, but have not personally verified it.

I'm glad you do, but the more I look into it, the less certain I am. I just keep reminding myself that there's no such thing as a free HECM, and the costs come out of your equity. :D

Along those lines, the paper by Wade Pfau previously linked in this thread ends as follows: "As well, it is important to note that strategies which open a line of credit and leave it unused run counter to the objectives of lenders and the government’s mortgage insurance fund. One day these opportunities may be eliminated."

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Sun Jul 31, 2016 11:58 am

@SuzBanyan, I was reading this last night: Report to Congress on Reverse Mortgages, Consumer Financial Protection Bureau, June 28, 2012. Not all 231 pages worth, just skimming for nuggets.

It has examples of different HECM cost scenarios, but not one for your case, where you create a line of credit but don't borrow. It said this about the annual FHA insurance:

    "Monthly MIP (Mortgage Insurance Premium): FHA assesses an ongoing MIP equal to 1.25 percent of the loan balance (principal drawn plus accumulated interest, MIP, and fees) per year on all loans, whether HECM Standard or HECM Saver. The 1.25 percent rate is an annual rate, but it is calculated and added to the loan balance on a monthly basis. Because of the negative-amortization feature of the loan, the MIP compounds in the same way that the interest does. Each month, borrowers are being charged MIP on a growing loan balance that includes prior interest and prior MIP." (emphasis added)

It also had this entertaining diagram about the secondary market, and a comment about uncertain funding of future payments to the borrower:

Image

The question mark is explained here:

    " For these products, the exchange of money is not only less predictable, but also more complicated than in the traditional mortgage market. The reverse-mortgage market has to contend with the extra question of which entity will provide the cash to make future payments to the borrower. Figure 32 illustrates this difference in cash flows between traditional mortgages and adjustable-rate reverse mortgages. The challenges this dynamic creates are discussed in greater detail in Section 4.4 and 4.5.3."
Good luck, and report back!
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Sun Jul 31, 2016 5:22 pm

For what it's worth, I am in the process of getting a reverse mortgage. We have no debt, two pensions, two Social Security incomes, a Vanguard Flagship account, LTC insurance and an expensive home that's paid for. After looking into the matter I opted for the HECM for two basic reasons:
1. My total upfront cost is $125 to pay for the counseling fee required of all HECM applicants.
2. I plan to use the HECM to establish a line of credit that will grow over time if not used. It will give me access to over $350,000 of tax-free liquidity if needed. It's very possible that neither Elke nor I will ever need to tap the line of credit, but it's better to have it and not need it than vice-versa.

Many, many thanks to Wade Pfau for steering me in the right direction. :beer
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by GreenGrowTheDollars » Sun Jul 31, 2016 6:42 pm

MIL had a large reverse mortgage on her home when she died. It forced us to sell in a very down market. That was not wonderful. If she had delayed taking the reverse mortgage for 10 years and instead had liquidated some of her investments, it would have been a lot better. More than half the balance due was accrued interest on the reverse mortgage. It builds up very quickly -- more quickly than her investments earned, by quite a bit. :oops:

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by dodecahedron » Sun Jul 31, 2016 6:53 pm

mlebuf wrote:For what it's worth, I am in the process of getting a reverse mortgage. We have no debt, two pensions, two Social Security incomes, a Vanguard Flagship account, LTC insurance and an expensive home that's paid for. After looking into the matter I opted for the HECM for two basic reasons:
1. My total upfront cost is $125 to pay for the counseling fee required of all HECM applicants.
2. I plan to use the HECM to establish a line of credit that will grow over time if not used. It will give me access to over $350,000 of tax-free liquidity if needed. It's very possible that neither Elke nor I will ever need to tap the line of credit, but it's better to have it and not need it than vice-versa.

Many, many thanks to Wade Pfau for steering me in the right direction. :beer


Thanks for sharing this experience. A few questions:

1) At what index rate formula will the line of credit grow?
2) Would you still find this worthwhile to do if you were not married?
3) What company are you using?

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Sun Jul 31, 2016 7:47 pm

dodecahedron wrote:Thanks for sharing this experience. A few questions:

1) At what index rate formula will the line of credit grow?
2) Would you still find this worthwhile to do if you were not married?
3) What company are you using?


To answer your questions in order:
1. I don't have the final figures yet. The house appraisal was just done last Wednesday. However, I expect the rate of growth will be approximately 5 percent.

2. Yes. In fact, being single would have been a slight advantage because the calculations are based on the youngest spouse and I am older than Elke. The older you are, the larger is the line of credit available.

3. The company I used is Reverse Mortgage Funding. I suggest getting a quote from at least 2 companies.
https://www.reversefunding.com

For the record, I am not, nor have I ever been in the business of financial planning, selling financial/investment products or reverse mortgages. I am simply a grateful Boglehead.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Sun Jul 31, 2016 11:15 pm

mlebuf wrote:For what it's worth, I am in the process of getting a reverse mortgage. We have no debt, two pensions, two Social Security incomes, a Vanguard Flagship account, LTC insurance and an expensive home that's paid for. After looking into the matter I opted for the HECM for two basic reasons:
1. My total upfront cost is $125 to pay for the counseling fee required of all HECM applicants.
2. I plan to use the HECM to establish a line of credit that will grow over time if not used. It will give me access to over $350,000 of tax-free liquidity if needed. It's very possible that neither Elke nor I will ever need to tap the line of credit, but it's better to have it and not need it than vice-versa.
Many, many thanks to Wade Pfau for steering me in the right direction. :beer

I have the impression that once you secure an HECM, your financing charges and annual FHA insurance premium begin to accrue as a loan balance, even if you have not borrowed against your line of credit. Have you received any information on this in your counseling or mortgage paperwork?
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Mon Aug 01, 2016 12:00 am

whaleknives wrote:I have the impression that once you secure an HECM, your financing charges and annual FHA insurance premium begin to accrue as a loan balance, even if you have not borrowed against your line of credit. Have you received any information on this in your counseling or mortgage paperwork?


I had that same question when I signed up. I asked the salesperson and Wade Pfau about it. I told them it seemed too good to be true but both assured me that no charges would accrue as long as I didn't borrow from the line of credit. That may not be true in all cases or for all HECM providers. If that turns out not to be true, I'll come back to this thread and post my disillusionment ASAP.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by dodecahedron » Mon Aug 01, 2016 1:07 am

Intriguing. If you can really pull this off for $125, it seems like an incredible put option on your home.

Reading this FAQ from National Reverse Mortgage Lenders Association, it seems clear that you would never be charged interest until you withdraw proceeds on any HECM. On the other hand, it is standard for there to be a 0.5% one time mortgage insurance premium (MIP) to be charged to the account during the first year of 0.5% even if no funds are borrowed during that year. I will look forward to an update from Michael after his HECM closes and statements start arriving.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by SuzBanyan » Mon Aug 01, 2016 9:29 am

mlebuf wrote:
whaleknives wrote:I have the impression that once you secure an HECM, your financing charges and annual FHA insurance premium begin to accrue as a loan balance, even if you have not borrowed against your line of credit. Have you received any information on this in your counseling or mortgage paperwork?


I had that same question when I signed up. I asked the salesperson and Wade Pfau about it. I told them it seemed too good to be true but both assured me that no charges would accrue as long as I didn't borrow from the line of credit. That may not be true in all cases or for all HECM providers. If that turns out not to be true, I'll come back to this thread and post my disillusionment ASAP.

My impression based on reading, not on applying, is that there Is no interest or fees accruing unless the loan is drawn upon. One exception is if the servicing fee is NOT included as part of the lender's margin on the interest rate, but apparently this seperate monthly fee has not been common since about 2010.

But I would think that the closing costs, etc., if not paid out of pocket, would be considered a draw on the loan. At 5% compounded, $12K would be about a $50k lien on the home in 30 years.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by dodecahedron » Mon Aug 01, 2016 10:10 am

SuzBanyan wrote:But I would think that the closing costs, etc., if not paid out of pocket, would be considered a draw on the loan. At 5% compounded, $12K would be about a $50k lien on the home in 30 years.


I would certainly think so too. I will be very interested to hear followups.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by whaleknives » Mon Aug 01, 2016 11:40 am

mlebuf wrote:I had that same question when I signed up. I asked the salesperson and Wade Pfau about it. I told them it seemed too good to be true but both assured me that no charges would accrue as long as I didn't borrow from the line of credit. That may not be true in all cases or for all HECM providers. If that turns out not to be true, I'll come back to this thread and post my disillusionment ASAP.

I don't see how the annual FHA insurance premium is paid.

dodecahedron wrote:Intriguing. If you can really pull this off for $125, it seems like an incredible put option on your home.
Reading this FAQ from National Reverse Mortgage Lenders Association, it seems clear that you would never be charged interest until you withdraw proceeds on any HECM. On the other hand, it is standard for there to be a 0.5% one time mortgage insurance premium (MIP) to be charged to the account during the first year of 0.5% even if no funds are borrowed during that year. I will look forward to an update from Michael after his HECM closes and statements start arriving.

And not just an initial premium:

    "HECM Costs . . .
    You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.
    Mortgage Insurance Premium You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan."
    FHA Home Equity Conversion Mortgage (HECM)

SuzBanyan wrote:My impression based on reading, not on applying, is that there Is no interest or fees accruing unless the loan is drawn upon. One exception is if the servicing fee is NOT included as part of the lender's margin on the interest rate, but apparently this separate monthly fee has not been common since about 2010.
But I would think that the closing costs, etc., if not paid out of pocket, would be considered a draw on the loan. At 5% compounded, $12K would be about a $50k lien on the home in 30 years.

There is a proposed disclosure form from 2012 that would help answer this, if it is used: Figure A-5: Federal Reserve Board proposed application disclosure for open-end reverse mortgages, "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012. Note the section "How the Loan Balance Grows" on page 2. Unfortunately, there was no example with only financing charges in a loan.

Image

Image

Image

I fourth all the thanks and requests for updates.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Mon Aug 01, 2016 6:54 pm

All those questions are intriguing. Here's my answer to all of them: I don't know. However I will share with you what I do know.

First, I am no authority on matters of investing and finance. However, I have been a student of finance and investing for over 20 years. Over those years I have learned that there is a lot of good, sound information out there. There is also a lot of information that sounds good but comes with a hidden sales agenda. My strategy is to focus on the former, ignore the latter and know the difference between the two.

Earlier this year, I began seeing highly reputed financial writers and financial planners recommending the value of a low cost reverse mortgage as a great option for some people. Some sources you may want to read:

The Wall Street Journal: http://www.wsj.com/articles/new-math-on ... 1458525888

Five articles by Wade Pfau:
1. http://papers.ssrn.com/sol3/papers.cfm? ... id=2685816

2.http://retirementresearcher.com/improvi ... i=27800732

3.http://blogs.wsj.com/experts/2015/11/30 ... mortgages/

4.http://retirementresearcher.com/academi ... mortgages/

5. http://retirementresearcher.com/upfront ... -mortgage/

Two articles by Scott Burns:
1. https://assetbuilder.com/knowledge-cent ... ncome-tool

2. https://assetbuilder.com/knowledge-cent ... -important

Jane Bryant Quinn: http://janebryantquinn.com/2013/08/a-gr ... -line-now/

Forbes: http://www.forbes.com/sites/jamiehopkin ... 068dd42158

Investment News: http://www.investmentnews.com/gallery/2 ... =Itemnr=10

Those articles were written by and published by people and organizations with stellar reputations for honesty, objectivity and integrity. In some of those articles you will read quotes from other highly regarded authorities such as Harold Evensky, Professor John Salter of Texas Tech, Professor Stephanie Moulton of Ohio State and others. When those people and publications agree on a common topic, it gets my attention.

To be sure, a reverse mortgage is not for everyone. If you think it's a bad deal, then don't get one. It's your money. However, if you are near or over age 62 and have a lot of home equity, I recommend looking into getting a low-cost HECM line of credit ASAP. The traditional recommendation is to wait but getting the HECM early allows more time for the line of credit to grow. I only wish I had been able to do this at age 62 over 12 years ago at such a low cost. If I had, my line of credit would likely be double today of what it will be.

It's possible that the law may be changed to make it a less than great deal. However, if it does change, those who secured the HECM prior to that date will be protected by contract.
Last edited by mlebuf on Mon Aug 01, 2016 11:54 pm, edited 2 times in total.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Mon Aug 01, 2016 9:07 pm

Redundant post deleted.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Mon Aug 01, 2016 9:34 pm

Redundant post deleted.
Last edited by mlebuf on Mon Aug 01, 2016 11:52 pm, edited 1 time in total.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Mon Aug 01, 2016 9:36 pm

Double post deleted. Sorry.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Mon Aug 01, 2016 11:49 pm

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by dodecahedron » Mon Aug 22, 2016 12:05 pm

whaleknives wrote:
mlebuf wrote:I had that same question when I signed up. I asked the salesperson and Wade Pfau about it. I told them it seemed too good to be true but both assured me that no charges would accrue as long as I didn't borrow from the line of credit. That may not be true in all cases or for all HECM providers. If that turns out not to be true, I'll come back to this thread and post my disillusionment ASAP.

I don't see how the annual FHA insurance premium is paid.

dodecahedron wrote:Intriguing. If you can really pull this off for $125, it seems like an incredible put option on your home.
Reading this FAQ from National Reverse Mortgage Lenders Association, it seems clear that you would never be charged interest until you withdraw proceeds on any HECM. On the other hand, it is standard for there to be a 0.5% one time mortgage insurance premium (MIP) to be charged to the account during the first year of 0.5% even if no funds are borrowed during that year. I will look forward to an update from Michael after his HECM closes and statements start arriving.

And not just an initial premium:

    "HECM Costs . . .
    You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.
    Mortgage Insurance Premium You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan."
    FHA Home Equity Conversion Mortgage (HECM)

SuzBanyan wrote:My impression based on reading, not on applying, is that there Is no interest or fees accruing unless the loan is drawn upon. One exception is if the servicing fee is NOT included as part of the lender's margin on the interest rate, but apparently this separate monthly fee has not been common since about 2010.
But I would think that the closing costs, etc., if not paid out of pocket, would be considered a draw on the loan. At 5% compounded, $12K would be about a $50k lien on the home in 30 years.

There is a proposed disclosure form from 2012 that would help answer this, if it is used: Figure A-5: Federal Reserve Board proposed application disclosure for open-end reverse mortgages, "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012. Note the section "How the Loan Balance Grows" on page 2. Unfortunately, there was no example with only financing charges in a loan.

I fourth all the thanks and requests for updates.


I have now read enough to understand how a company might be able to offer the deal mlebuf is apparently applying for. Yes, there are all the upfront costs that whaleknives mentions, but from what I have read in the Pfau links, it appears some companies absorb those upfront costs in exchange for a higher interest rate in the HECM contract and not as a draw on the loan. Of course, someone who doesn't plan to tap the HECM for many years may not care about the higher rate, since the HECM's available line of credit (LOC) will also grow at the higher rate, without any interest being charged. Of course, the higher interest rate will also result in a lower initial LOC at the outset, but eventually it will catch up and eventually exceed the LOC on the contract where you paid the upfront costs (either by paying in cash or tapping the LOC initially to cover those costs.)

There is apparently only one cost that can't be "rolled into" that higher interest rate, and that is the (approximately) $125 cost you need to pay to a nonprofit counseling agency (of your choice from an approved list) to make sure that you understand what a HECM involves, including the downsides.

So I now believe that there could be financial institutions offering the deal that mlebuf describes. I tried to contact the firm he said he was using to find out more about their offerings, but I have been unable to reach them so far. They weren't answering their phones. They have an email response form on their website but it requires entering an address and using a drop-down menu of states. Unfortunately that dropdown menu does not include my state (NY), which makes me think they may not be licensed to operate here. (Lots of regs in NY that companies might not want to deal with.) But it could also just be an oversight.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by ResearchMed » Thu Aug 25, 2016 5:15 pm

dodecahedron wrote:
whaleknives wrote:
mlebuf wrote:I had that same question when I signed up. I asked the salesperson and Wade Pfau about it. I told them it seemed too good to be true but both assured me that no charges would accrue as long as I didn't borrow from the line of credit. That may not be true in all cases or for all HECM providers. If that turns out not to be true, I'll come back to this thread and post my disillusionment ASAP.

I don't see how the annual FHA insurance premium is paid.

dodecahedron wrote:Intriguing. If you can really pull this off for $125, it seems like an incredible put option on your home.
Reading this FAQ from National Reverse Mortgage Lenders Association, it seems clear that you would never be charged interest until you withdraw proceeds on any HECM. On the other hand, it is standard for there to be a 0.5% one time mortgage insurance premium (MIP) to be charged to the account during the first year of 0.5% even if no funds are borrowed during that year. I will look forward to an update from Michael after his HECM closes and statements start arriving.

And not just an initial premium:

    "HECM Costs . . .
    You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.
    Mortgage Insurance Premium You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan."
    FHA Home Equity Conversion Mortgage (HECM)

SuzBanyan wrote:My impression based on reading, not on applying, is that there Is no interest or fees accruing unless the loan is drawn upon. One exception is if the servicing fee is NOT included as part of the lender's margin on the interest rate, but apparently this separate monthly fee has not been common since about 2010.
But I would think that the closing costs, etc., if not paid out of pocket, would be considered a draw on the loan. At 5% compounded, $12K would be about a $50k lien on the home in 30 years.

There is a proposed disclosure form from 2012 that would help answer this, if it is used: Figure A-5: Federal Reserve Board proposed application disclosure for open-end reverse mortgages, "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012. Note the section "How the Loan Balance Grows" on page 2. Unfortunately, there was no example with only financing charges in a loan.

I fourth all the thanks and requests for updates.


I have now read enough to understand how a company might be able to offer the deal mlebuf is apparently applying for. Yes, there are all the upfront costs that whaleknives mentions, but from what I have read in the Pfau links, it appears some companies absorb those upfront costs in exchange for a higher interest rate in the HECM contract and not as a draw on the loan. Of course, someone who doesn't plan to tap the HECM for many years may not care about the higher rate, since the HECM's available line of credit (LOC) will also grow at the higher rate, without any interest being charged. Of course, the higher interest rate will also result in a lower initial LOC at the outset, but eventually it will catch up and eventually exceed the LOC on the contract where you paid the upfront costs (either by paying in cash or tapping the LOC initially to cover those costs.)

There is apparently only one cost that can't be "rolled into" that higher interest rate, and that is the (approximately) $125 cost you need to pay to a nonprofit counseling agency (of your choice from an approved list) to make sure that you understand what a HECM involves, including the downsides.

So I now believe that there could be financial institutions offering the deal that mlebuf describes. I tried to contact the firm he said he was using to find out more about their offerings, but I have been unable to reach them so far. They weren't answering their phones. They have an email response form on their website but it requires entering an address and using a drop-down menu of states. Unfortunately that dropdown menu does not include my state (NY), which makes me think they may not be licensed to operate here. (Lots of regs in NY that companies might not want to deal with.) But it could also just be an oversight.


mlebuf: Any update on this loan process?

I'm going to try to contact them tomorrow (it's too late today), and see what they have to say.
I don't think we are quite ready for this yet, and by the time we are ready, the types of reverse mortgages and terms may have changed.
But the idea of no costs accruing (except the minor counseling fee) until/unless one actually draws on the line... that is very appealing indeed.
Curious if it *really* works that way.

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by dbp7777 » Fri Sep 30, 2016 7:25 am

Wondering if MLEBUF has been able to finalize his Reverse Mortgage transaction.....

Any updates?

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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by mlebuf » Sun Oct 09, 2016 1:48 pm

On August 29, Elke and I signed the papers on our HECM. Our initial line of credit is just shy of $370,000 and will appreciate at an annual rate of approximately 4 percent if interest rates remain unchanged. If interest rates increase, the rate of of line of credit appreciation will increase too. My total out of pocket cost was only $125 to pay for the HUD counseling fee.

I asked the rep how the company made money and he said the money is made by securitizing the loans.
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Re: Self insure for LTC using Reverse Mortgage HECM?

Post by dodecahedron » Sun Oct 09, 2016 2:03 pm

mlebuf wrote:On August 29, Elke and I signed the papers on our HECM. Our initial line of credit is just shy of $370,000 and will appreciate at an annual rate of approximately 4 percent if interest rates remain unchanged. If interest rates increase, the rate of of line of credit appreciation will increase too. My total out of pocket cost was only $125 to pay for the HUD counseling fee.

I asked the rep how the company made money and he said the money is made by securitizing the loans.


Securitizing the loans apparently means they sell them to someone else for more than the upfront costs they have advanced on your behalf, but the question is why anyone would buy the loans. After talking to Wade Pfau at Bogleheads and reading his new book, I gather that the only thing that makes buying these loans attractive to investors is the underpriced federal mortgage insurance.

This may explain why the company offering this deal is not able to operate in my state (NY), due to its relatively stringent insurance and finance regulations.

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