Bridging the Gap: How to Talk to Clients About Home Equity

In the face of prolonged market volatility, rising healthcare costs, and extended longevity, the traditional “three-legged-stool” approach to retirement income has become wobbly and insufficient. And even though the home typically represents over 50% of a client’s total net worth, more often than not, that wealth is left on the table – untapped and undervalued as a fourth leg of stability to help maintain financial security in retirement. That is why it is never too early to discuss incorporating reverse mortgage solutions into a client’s strategic plan. Unfortunately, many advisors are unsure how to begin the conversation with their 55+ clients. So, let’s look at how to bridge that educational gap and help your clients understand the real value of their home equity from a holistic planning approach. We know you may get some pushback. We know the conversation might be uncomfortable at first. You’re going to be up against unfounded misconceptions and questions like, “Why do I need that? Isn’t a reverse mortgage a last resort?” But by using effective methods like these to broach the topic, you can pique your clients’ interest while illustrating the impact their housing wealth can have on their portfolios.

“We cannot ignore the fact that home equity represents a large portion of your net worth.”

“Housing is one of the largest expenses alongside healthcare during retirement.”

“Home equity can be used as a buffer asset to protect your investment portfolio and create a safety net for unforeseen expenses like long-term care.”

“Even if we don’t pursue a reverse mortgage, given your eligibility, we should check whether it’ll help you reach your financial goals over the next 10+ years.”

“Reverse mortgages are not for the impoverished or a loan of last resort – they simply add an extra layer of financial security to your overall strategic plan.”

Public misconceptions abound when it comes to reverse mortgages. Having been long maligned in the media, it’s no surprise that – despite pre-existing and expanded consumer safeguards – reverse mortgages are still largely misunderstood. Your clients may be hesitant to talk about utilizing their home equity because of what they think they already know. Here are five of the most common myths that your clients may bring to the table and the facts you need to help them move beyond their initial reservations. FACT: Just like any mortgage or home equity loan, you continue to own the home, with your name on the title. You must meet your loan obligations: keeping current with taxes, homeowners insurance, and maintenance. “The bank will own my home.” “I probably won’t qualify because I already have a mortgage.” FACT: Proceeds from your reverse mortgage would first be used to pay off any existing mortgage(s). “I won’t be able to leave my home to my heirs.” FACT: Your heirs will still inherit the home, but they will have to pay back the loan balance if they want to keep the home; this includes the amount of funds you used plus accrued interest and fees. They can also choose to sell the home to repay the loan. Once the loan is repaid, they receive any remaining equity – just like a traditional mortgage or home equity loan. “Reverse mortgages are designed to take advantages of retirees.” FACT: Reverse mortgages are specifically designed to help retirees. The ability to access home equity can provide a greater sense of security, and more financial flexibility. The industry is also highly regulated: Any lender offering reverse mortgages must follow strict state and federal guidelines and regulations that are in place to protect borrowers. “A reverse mortgage should only be used as a last resort.” FACT: Many savvy homeowners use a reverse mortgage strategically – for example, as a safety net in case of emergencies. In recent years, there have been a number of product advances that have made reverse mortgages more attractive, and academic researchers at respected universities have developed effective strategies for using a reverse mortgage as part of an overall retirement plan.

One of the chief considerations, particularly for price-conscious clients, is likely to be the fees associated with a reverse mortgage loan. Like any other financial product, such as an annuity, your clients will want a cost analysis to help them better understand the pros and cons of tapping into their home equity. Although reverse mortgage fees vary depending on the borrower profile and loan product selected, most charges (other than the government-required reverse mortgage counseling * ) can be financed through the loan, thus cutting down on up-front costs. Here are a few key points of interest for your clients to consider from a cost perspective:

Financed Amount

Charge

Pay To

HECMs include an up-front Mortgage Insurance Premium (MIP) of 2% of the appraised home value, which is paid to HUD * and typically accounts for a majority of the initial fees Individual rates and fees depend on various factors, such as current interest rates, borrower’s age, and value of the home The MIP ensures the availability of funds, and offers non-recourse protection so that the borrower won’t owe more than the home is worth when the loan is repaid Equity Elite ® does not include a MIP, resulting in lower up-front costs. The Equity Elite ® ZERO product also offers a lender credit that can be applied toward most closing costs †

Loan Origination Fee

4,650.00

MERS

MERS

11.95

Document Preparation

Baydocs

125.00

Appraisal Fee

700.00

Credit Report

40.50

Flood Certificate 15.50 Mortgage Insurance Premium HUD 16,000.00 Settlement Fee 700.00 Abstract or Title Search 75.00 Lenders Title Insurance 1,916.00 Notary Fees 200.00 Recording Fee - Mortgage 150.00 Notice of Settlement 150.00 Counseling Fee 125.00 Total $24,858.95

* This material has not been reviewed, or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/ FHA or any other government agency. † With this pricing option, borrower receives a lender credit covering nearly all closing costs. There is a non-refundable independent counseling fee of approximately $125 on average, which the borrower pays directly to the counseling agency. Terms and conditions apply. Not available in all states. FOR ILLUSTRATIVE PURPOSES. Not available in all states. Certain conditions and fees apply. Information shown for illustrative purposes only. Assumptions are: (1) 62-year- old borrower; (2) IL home valued at $800,000; (3) LOC will grow at 0.5% above the interest rate for an Adjustable-Rate Mortgage (ARM), which uses the 1-YEAR CMT plus a margin of 2.25%. The initial interest rate is 3.92% which can change annually. There is a 2% annual interest cap, and a 5% lifetime interest cap over the initial interest rate. Maximum interest rate is 8.92%; (4) the growth rate remains at 4.42%; (5) Annual Percentage Rate (APR) is 3.92%. Maximum Annual Percentage Rate (APR) is 8.92% (6) there are no draws taken from the line of credit by the borrower. Rates and funds available may change daily without notice.

Reverse mortgages are not a one-size-fits-all financial solution. Each loan is different, as is the impact it will have on an individual client’s financial probabilities of success. That is why it is essential to create an open dialogue with your clients regarding their housing wealth and the significant role it could play in bolstering their financial security in retirement. To help you get started, we offer an unbranded, consumer-friendly presentation tool. Download your free copy of The Facts About Reverse Mortgages at reversefacts.com/education. After educating a client on the fundamentals of reverse mortgages, the most practical next step is to get a customized loan quote that factors in the financial stressors, risks, and goals of the individual. Remember, when used strategically, a reverse mortgage provides extra income-tax-free * cash to fund unforeseen expenses and healthcare, helps to mitigate sequence risk, and expands financial solvency while creating a larger legacy. And when implemented as a buffer asset, a reverse mortgage can help foster portfolio longevity and growth of custodial assets.

98% Customer Satisfaction rating as of January 2022. LendingTree, Trustpilot, and Better Business Bureau ratings as of July 2022. * Not tax advice. Consult a tax professional. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/ FHA or any other government agency.

NOT FOR CONSUMER USE. ©2022 Reverse Mortgage Funding LLC, 1455 Broad Street, 2nd Floor, Bloomfield, NJ 07003, 1-888-494-0882. Company NMLS ID: #1019941. For licensing information, go to: www.nmlsconsumeraccess.org. Arizona Mortgage Banker License #0927682; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act; Loans made or arranged pursuant to a California Financing Law license; Georgia Mortgage Lender Licensee #36793; Massachusetts Mortgage Lender License #ML1019941; Licensed by the New Jersey Department of Banking & Insurance; Licensed Mortgage Banker-NYS Department of Financial Services -in-state branch address 700 Corporate Blvd, Newburgh, NY 12550; Rhode Island Licensed Lender. For California consumers: For information about our privacy practic- es, please visit https://www.reversefunding.com/privacy. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. L4700-Exp072023