Tom MacDonald - Reverse Mortgage Consultant






       Reverse Mortgage Consultant

      Tom MacDonald


       707-265-6385      800-801-5727   Is This The Best Reverse Mortgage Website in the U.S.*

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Reverse Mortgage Consultant- Tom MacDonald BBB Business Review

$12,000 to $1,000,000 +/-**

**I'll revise this page after I return from vacation in late October.  This is because a change in the MIP and the PLF (think Loan to Value - LTV) while I'm on vacation will drastically change these numbers. 

What if I suggested you could invest $12,000 and see it grow to as much as $1,000,000 or more to use during your lifetime with no downside and no taxes.

Sure, you'd run the other way.  It is way too good to be true. 

If you've looked at my other pages, you may agree I'm a straight arrow and tell it like it is without any embellishments.  So stick with me for a little bit.

Since this is a Reverse Mortgage website, you can be sure I'm not talking about mutual funds, oil wells, derivatives, or some other legitimate or funky investment instrument.

Let's go into more detail.  Many people don't understand that a HECM Reverse Mortgage has a line of credit (LOC) option that grows at the same interest rate that the borrower is charged.  The amount the borrower is charged is based on an index, margin and Mortgage Insurance Premium (MIP) paid to FHA.  Currently, the index is bouncing around 0.25% (one quarter of one percent).  Margins differ from lender to lender but currently ranging from 2.25% to 3.00%.  The chart below is using 2.5%.  MIP is 1.25%.  The chart is using a total of 4.00% for the lower curve.

But one would have to agree interest rates won't stay this low forever.  In fact, when we calculate how much a borrower initially receives, we use what is called the expected rate.  Instead of a one month LIBOR used to calculate how much you pay us (as above), this uses the 10 year LIBOR to estimate what rates might be over the longer term.  That currently is about 5% plus 1.25% for MIP for a total of 6.25%.   This rate is actually below the 25 year average of HECM rates if using the same index and margins (they have bounced around over the years).  This is represented by the middle curve.  The one that grows to about $1,000,000

The third curve is assuming an average of 9%.  Hope we don't go there but I have clients with just the line of credit who keep rooting for higher rates.

The home value is assumed as $300,000 (with no mortgage or other liens or draws at closing) appreciating at 3%.  I'm physically in Napa, considered part of the San Francisco Bay Area and more specifically the North Bay.  $300,000 is just about the minimum value of a home.  Other counties in the area have significantly higher home values.  No matter where you are or what your home is worth, you can look at the chart and eyeball what the numbers might be for you.  If your home is worth $150,000 then just consider the lines to be half their size.  If $600,000, then double the lines.  (Don't go any higher in value than that.  The FHA has a home value maximum they use to calculate how much you get of $636,150 [as of 1/1/2017].)

The chart starts at age 62 so if you are older, the amount will start slightly higher if rates stay near where they are for awhile.  But will also get smaller as rates go up.

Line of Credit Growth Chart ExampleFrom an article by Tom Davidson

Now, you can see where the $1,000,000 came from.  Not a really outlandish number.

Let's talk about the 'investment' amount of $12,000.  I look at this approach and think of it as an investment.  In reality, it is a fee.  A fee you may not pay out of your pocket.  The fee is usually added to the initial balance with interest compounding over time (like the LOC).  A borrower is usually asked to pay two fees out of pocket.  A counseling fee which is usually $125 but sometimes lower.  An appraisal fee somewhere in the $500 range.  Frequently lower and rarely higher.  You could, in fact, reimburse yourself by advancing that amount at closing.  Or maybe you don't want that fee to grow with added interest.  You could pay it down to nearly nothing and it would be a minimal amount when the loan is due.  The loan is due when you sell, move or pass away.  Many people, at this point, plan to stay in their house the rest of their lives.  In this case, you would not have used that fee to grow the LOC and not even have to pay that back (although your heirs will).

And, the $12,000 I mention is not really $12,000.  If the home is valued at $300,000, typical fees will be slightly under $9,000.  Lower valued homes will be less.  Only at the maximum home value of $636,150 will the fees be near $12,000.

I used the words in the sub-headline " use during your lifetime...".  When the loan comes due - sell, move, pass away - the LOC is not considered (like a credit card with a limit still available) and the actual equity in the house (value minus loan amount) is the amount available to the borrower or heirs.  If you haven't needed to use the LOC, that will likely be a significant amount.

Then I said, "...with no downside...".  Unlike, say mutual funds or stocks in general that may fluctuate up and down, the LOC growth is always up.  It is because the factors always include MIP (always 1.25%), the margin (by contract) and index (even as low as 0.25% it has never gone negative).  It wouldn't make sense.

And then, "...and no taxes." When you draw the funds, they are not taxable.  You are advancing funds from a loan.  It is not income.

Perhaps this will help you see Reverse Mortgages from a different perspective.  Reverse Mortgages have a 'reputation' of being 'too expensive' and not worth considering.  If you look at the 'fee' as an 'investment' (that you may not be out of pocket) and with no possibility of loss of principal, how does that compare with other choices available to you.

You may wish to see the companion article, "I Don't Need a Reverse Mortgage."