A HECM reverse mortgage has closing costs that are comparable to standard FHA loans. The only cost that is higher with a HECM is that FHA mortgage insurance is higher. For a home with a $400,000 HECM line of credit, the FHA mortgage insurance might be around $16,000 instead of $9,000 for an ordinary FHA mortgage. It is a difference of around a $7,000.
But it is not that much when you consider the advantages and protective features the HECM includes. The FHA HECM is more than a mortgage. It is a retirement tool. It is a line of credit that cannot be cancelled and continues to grow.
Advantage: There are no required principal or interest payments for the life of the borrower and then for the life of the borrowing or non-borrowing spouse. The interest accumulates at a rate that is in almost all areas less than the increase in property value.
Advantage: Accumulating HECM interest is tax deductible, although there is a debate as to whether it is deductible yearly as it accrues or when the HECM is paid off and the cash for interest goes to the lender. Read.
Advantage: When HECM borrowers need money, they can draw it tax free from their HECM instead of drawing it from their asset-protected 401k. Money drawn from a 401K is taxable when drawn. Draw money from the reverse mortgage so that money can remain in the 401K and continue to earn dividends.
Advantage: I have a reverse client who owns numerous very valuable guitars, many of them made by Martin. These are worth $5,000 and $10,000 and $20,000, and they are increasing in value. He only owes $200,000 on his home, and it is worth over $1 million. With his new reverse mortgage line of credit of around $200,000, he will be able to take money out of his home rather than sell off guitars. He can keep making money on his guitars instead of selling them and having to pay tax on the capital gain. And when he dies, his wife will inherit the guitars at a “stepped up basis”, meaning that she will be able sell them and pay no capital gain.
Advantage: The FHA HECM home equity line of credit in 2021 carried an adjustable interest rate of 2.75% per year. The line of credit increases at the current interest annual rate, 2.75% per year in 2021 plus .5%. The line of credit grows faster than the interest accumulates. My client with the guitars will pull around $250,000 from his new $400,000 line of credit. If he pays no interest payments, which are optional, his balance will go up around $7,500 per year, while his home will go up in value $100,000 per year.
Advantage: If the borrowers obtain a HECM, there is a greater likelihood that the borrowers will be able to keep the home and therefore have more equity to leave to their heirs.
Advantage: There is a guarantee that heirs can buy the family home for 95% of appraised value. This would be the case in an area where properties are not appreciating or are falling, especially if the borrower is living to a ripe old age and has drawn a lot of money from the reverse mortgage.
Advantage: The FHA HECM protects the housing asset. The borrower will have a line of credit that cannot be cancelled, that will grow every year, and that will cover putting on a new roof and painting the home from time to time. HECMs prevent foreclosures. Payments are optional. The parents are more likely to be able to retain the property, avoid going into an adult care facility, pay for in-home care in their final years, and leave the property to their heirs. And the property value probably would have increased substantially.
