Tag Archives: Reverse Mortgage

5 Ways A Reverse Mortgage Can Fit Into Your Retirement Plan


How can a Reverse Mortgage be used for retirement security?

  1. Replace cash reserves
  2. Delay drawing Social Security payments and pension payouts
  3. Loan Proceeds are not considered income and can be used as a tax- free income supplement
  4. Eliminate monthly mortgage payments to help increase cash flow
  5. Buffer spending of investments in a down market


The Big Picture

Home equity is a dynamic financial tool that should be discussed when planning your retirement.

Call or Email me to set up a free consultation on the pros and cons of a Reverse Mortgage and how it may fit into your families long term plans.

Tyson Underwood – 310-540-1330 or tyson@american-california.com


The Importance of Home Equity in Retirement Planning


The Importance of Home Equity in Retirement Planning | MyKCM

We often discuss the difference in family wealth between homeowner households and renter households. Much of that difference is the result of the equity buildup that homeowners experience over the time that they own their home. In a report recently released by the nonpartisan Employee Benefit Research Institute (EBRI), they reveal how valuable equity can be in retirement planning.

Craig Copeland, Senior Research Associate at EBRI, recently authored a report, Importance of Individual Account Retirement Plans and Home Equity in Family Total Wealth, in which he reveals:

“Individual account retirement plan assets, plus home equity, represent almost all of what families have to use for retirement expenses outside of Social Security and traditional pensions. Those families without individual account assets typically have very low overall assets, so they have almost nothing to draw from for retirement expenses.”

The report echoed the findings of a working paper, Home Equity Patterns among Older American Households, authored by Barbara Butrica and Stipica Mudrazija of Urban Institute. Fannie Mae highlighted these findings for their blog The Home Story this past winter, quoting Butrica and Mudrazija:

 “For most adults near traditional retirement age, a home is their most valuable asset — dwarfing retirement accounts, other financial assets, and other nonfinancial assets. Although relatively few retirees tap into their home equity, having it provides financial security… In fact, many retirement security experts argue that the conventional three-legged stool of retirement resources — Social Security, pensions, and savings — is incomplete because it ignores the home.”

USAToday interviewed two area experts to comment on the EBRI report. Randy Bruns, a private wealth adviser with HighPoint Planning Partners, agreed with the findings:

“Social Security and home equity are major pieces of the retirement puzzle.”

Wade Pfau, Professor of Retirement Income at The American College of Financial Services and author of Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement, said having the equity without a plan to use it won’t help:

“Home equity is a very important asset for American retirees, and so it is important to think about how to make best use of home equity in retirement planning.”

Bottom Line

Whether you use the equity in your home through a reverse mortgage or by selling and downsizing to a less expensive home, it should be a crucial piece of your retirement planning.

How Does the Reverse Mortgage (HECM) Line of Credit Work?


One of the most powerful features of the Home Equity Conversion Mortgage is that the unused portion of the Line of Credit has a built in guaranteed growth factor. So that once the line is established, it will continue to grow regardless of the home’s value. Some have “asked how is this possible?” And the answer is really pretty simple; it was designed into the program in 1988 and has never changed.

Case Study

  • Pierce and Linda (Ages 62) have a $400,000 home
  • They have an existing Mortgage Balance of $100,000 that carries a monthly payment that they would like to get rid of
  • So they establish a HECM Reverse Mortgage
  • The PRINCIPAL LIMIT (PL) is the amount of money that is made available to them based on (1) the Age of the Youngest Borrower (2) The Value of the Home (up to $625,500) and (3) The current interest rates.
  • Pierce and Linda have $200,000 that is made available to them
  • The HECM must be a first mortgage, so $100,000 is taken out to pay off their existing mortgage and eliminate their mandatory monthly payment. Financed closing costs for this loan are $5,000.
  • So Pierce and Linda’s Initial OUTSTANDING LOAN BALANCE (OB) is $105,000




So their Initial LINE OF CREDIT (LOC) of $95,000 is equal to the PRINCIPAL LIMITOUTSTANDING BALANCE


The First Year

  • The PRINCIPAL LIMIT of the HECM is ALWAYS Growing at the Note Rate: Interest Rate + Lender’s Margin + HUD MIP

(**Notice** This Example just shows the Lender’s Margin + HUD MIP,
because it’s the MINIMUM Growth Factor! Today’s actual growth rate is around 6.1%)

  • So you will notice below that the Principal Limit grew from $200,000 to $210,000 (or by 5%)
  • The OUTSTANDING BALANCE is also ALWAYS Growing at the Note Rate: Interest Rate + Lender’s Margin + HUD MIP
  • Notice it grew from $105,000 to $110,250 (or by 5%)
  • The difference between the Principal Limit and the Outstanding Balance = 1st Years Line of Credit of $99,750

The Subsequent Years:

  • Notice below that the Principal Limit and the Outstanding Balance are Always Growing in a HECM
  • If a voluntary mortgage payment is made, it will reduce the Outstanding Balance, but the Principal Limit will always be growing at the Note Rate
  • Notice below that Line of Credit therefore is growing as well, regardless of the underlying home’s value, the client’s income, assets or credit worthiness



Join the Retirement Income Conversation HERE


So there you have it. A very simple and powerful tool called the HECM Line of Credit. One tool capable of solving so many retirement income challenges.

Don’t Forget the Home Appreciation

Many advisors forget that the underlying asset is still appreciating. Below we show a 3% and 4% average appreciation for illustration sake; actual appreciation will naturally fluctuate. But the point is that the home itself is an appreciating asset. So in this example, one would simply need to subtract the outstanding balance from the potential future home value to determine what passes on to the estate. **Note** In certain scenarios, the home’s equity may be intentionally depleted in order to increase or preserve the overall value of the estate (which could mean preserving Equities from premature depletion, etc).


Too Good to Be True?

So many have questioned if this is this really true. In August of 2016, AARP Public Policy Institute made a recommendation to congressional policy makers that the HECM Line of Credit (which has functioned the same waysince 1988) was too good and the HUD should consider eliminating the growth feature of the program. I don’t know what will come of this suggestion in the future, but for now, establishing a Standby HECM Line of Credit could be a tremendous financial planning strategy.


Let’s talk Stats Boomers… Ready to Retire?

Thanks for this


Are your retirement plans in place, locked down and solid?  Or do you or maybe your parents fall into the overwhelming statistics below?

  • Baby Boomers are turning 62 at a rate of 10,000 a day.
  • Senior home equity is at an all time high.
  • They live longer, are active, carry debt, and have equity.
  • 25,000,000 households with Americans over 65.
  • 85+ is the fastest growing demographic in America.
  • Federal Reserve estimates 50% of Boomers with no retirement savings.
  • $49,800 average savings of those who have saved.
  • $51,000 is average annual cost of assisted living.
  • 80% of seniors have substantial equity in their homes.
  • 81% of seniors plan to remain in their homes as long as possible
  • 43% of current HECM seniors report that without their Reverse Mortage, they could not remain in their home.
  • 23% married social security beneficiaries  receive 90% of their income from SSI.
  • 43% Single social security beneficiaries receive over 90% of their income from SSI.
  • 30% gap between social security and desired monthly income
  • Inflationary pressures on Fixed Income.
  • Health care costs continue to rise.
  • ZERO alternative sources of additional monthly cash for most seniors other than home equity.

Top 3 Things Second-Wave Baby Boomers Look for in a Home

Top 3 Things Second-Wave Baby Boomers Look for in a Home | MyKCM

According to data from the U.S Census bureau, there are approximately 76.4 million baby boomers living in the United States today. Contrary to what many think, there are very different segments within this generation, and one piece that sets them apart are their housing needs.

John McManus, editorial director of Hanley Wood’s Residential Group says his company “is focusing on the preferences of the younger half, or second-wave baby boomers, as they exhibit different needs than the older boomers.”

What are ‘second-wave baby boomers’ looking for?

McManus says, “They are seeking a fun, dynamic lifestyle with a home that can also adjust to their changing needs in the future. Living space should either include accessibility features, such as doorway space, lower shelves, and nonslip surfaces, or be easily adjustable when the time comes.

In a homebuyer study performed by The Farnsworth Group, the participants revealed their reasons for purchasing a new home. The top three factors that influence their purchase include area/location (50.2%), price/affordability (37.4%), and the layout of the home (19%) (as shown in the graph below).

Top 3 Things Second-Wave Baby Boomers Look for in a Home | MyKCM

The report also found that when buying a new home, there were other concerns like quality of construction (9%), a safer neighborhood (8.4%), better floor plans (8.25%). The most important rooms or areas are the kitchen (82.8%), master bedroom (59.2%), and great room (36%).

Technology also plays an important role! Second-wave baby boomers prefer wireless security systems (7.1%), lighting that senses and adapts to them (6.3%) and integrated home technology, including “smart” thermostats and lighting controlled by a smartphone (6.2%).

Grey Matter Research and Consulting points to a sense of community as a major factor in wanting to purchase:

The first impressions are important when entering a new community, as is feeling welcome in the community. Amenities such as clubhouses, pools, and walking trails featured prominently in the decision to purchase in a community. Location was key, as residents want their new homes to be near shopping, dining, medical services and entertainment.

Bottom Line

If you are one of the many ‘second-wave’ baby boomers who is starting to feel like their current homes no longer fit their needs, take advantage of the low inventory of existing homes in today’s market by selling your current home and moving on to one that truly fits your new lifestyle.