Big Changes Coming to the HECM Market in October

If you have been thinking about establishing an expanding line of credit on your primary residence (aka Home Equity Conversion Mortgage), now is the time to do it! The rules will change on October 2nd resulting in a substantial increase in associated upfront costs.

This announcement was unexpectedly declared on August 29th by the U. S. Department of Housing and Urban Development (HUD). “Given the losses we’re seeing in the [reverse mortgage] program, we have a responsibility to make changes

Downsizing the HECM Way

There comes a time in most baby boomer couples’ lives, where your kids have flown the coop and start families of their own. Initially they come visit you while their children are young and not in school or organized activities. Then comes your grandchildren’s middle school, and typically at this point, they come to visit less due to life’s busyness.

Like many couples, you may be experiencing less and less family visits to your large, debt-free home, whether in the Midwest or here in beautiful Naples, FL. You might begin to ask yourself why you are carrying the costs associated with a large home. So, you begin to think about downsizing to a more manageable home from a life and cost perspective.

The thought of downsizing can be terrifying in terms of how to orchestrate the physical and financial move to a less expensive and smaller residence. You go out, you find a house or condo that’s a little more manageable for your needs for the next phase of your life. Since you’ve been debt-free, you just assume you’ll pay cash and have no mortgage for your new residence. But is that the best course of action?

MAKING THE MOST OUT OF YOUR DOWNSIZE

Instead of paying cash for this new house, consider establishing what’s called a Home Equity Conversion Mortgage for Purchase (HECM). A HECM for Purchase enables you to place a mortgage on the new purchase, like a traditional mortgage, without requiring you to make interest and principle payments that the loan accrues over the life of the mortgage (you still must pay your real estate taxes, property insurance, and HOA fees, if any). After you sell the home, the HECM is paid back.

What’s the advantage here?

  • Homeowners have extra cash to invest for retirement income
  • No monthly debt servicing of principle and interest
  • Less stress on investment portfolios, so assets will likely last longer
  • If the loan balance is greater than the value of the residence at time of departure, there’s no required payback/recourse

CASE STUDY

Jim (70) and Laurie (68) are Illinois residents with a primary residence in a desirable neighborhood. The future market value of their home is $1.5M and they have no mortgage debt. They have enjoyed this home with their children and grandchildren for decades, however, they’ve come to realize it’s time to downsize. They desire to move to beautiful Naples, FL and purchase a coach home for $700,000. If they become residents of Florida, they save on state income taxes (which are going up in IL), property taxes, and live in year-round warm weather for golf and tennis.

Their initial inclination was to purchase this Florida coach home with the proceeds from the sale of their IL home. However, when they met with a wealth advisor and studied cash flow analysis and net worth projection, they became concerned that their investments might not survive them. Their advisor suggested placing a HECM for purchase on their new Naples property. Based upon their ages, they would qualify for a mortgage of $340,000. This is $340,000 more that they could invest to generate retirement income. When the advisor reran the projections, there was less stress on the cash flow/budget and their assets lasted considerably longer.

WHEN DOES A HECM FOR PURCHASE MAKE SENSE?

As a fee-only wealth advisor, I want to have every financial tool available to best serve my clients. I advise eligible clients to establish a HECM as a standby expanding line of credit or a HECM for Purchase on their primary residences for several reasons:

Again, a HECM is not for everyone, but if you are eligible, it can be a great way to help fund your financial future!


Rob O’Dell, CFP®, serves clients in our Naples, FL office. With more than 20 years of personal financial planning experience, Rob knows that successful financial planning involves a distinct process, not a one-time event.

Rob has been featured in the Wall Street Journal, Financial Planning Magazine, The Daily Herald and Money Magazine. He was a contributing author on the Third Edition of the Florida Domicile Handbook. Learn more about Rob O’Dell.

www.coylefinancial.com
800-480-7913 | coyle@coylefinancial.com

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Not Your Father’s Reverse Mortgage

Last year I was meeting with a baby boomer client couple in the suburbs of Chicago. They were in their early 60s, and we were discussing “What’s Next?” for them as they transition from vocation to avocation (aka semi-retirement yet engaged in life). They mentioned they might like to relocate to the Carolinas, where the cost of living is lower, the climate’s better, and to be closer to family. I advised them to establish a standby expanding line of credit which is a Home Equity Conversion Mortgage (HECM).  This could give them tax free cash on their home equity in the event they found a property in the Carolinas sooner than later and needed to act fast to seize the opportunity.  

Want to retire and move out of Illinois? – Pick up your “Get Out of Illinois” Card

Plan now and minimize Illinois real estate risks

A few months ago, I was meeting with a client at my office. We were discussing her move to Florida and she said, “Illinois is a great state to be from!” As a former Illinois resident myself, I couldn’t agree more!

For the third consecutive year, the Land of Lincoln (aka Illinois) has lost more residents than any other state to the Sun Belt states. In 2015, over 22,000 Illinois residents left, my family of four included! In 2016, that number rose to 37,000. By most measures, Illinois will continue to see its’ population decline in the coming years. The alarming part of this exodus is that the people leaving the state are higher income earners who pay higher state income property taxes.