The combination of increased longevity and declines in the
coverage of defined benefit pension plans means that
increasingly retirees risk running out of money because they
live too long. Those who have significant equity in a home,
however, can reduce or eliminate the risk if they use their
equity wisely.
This article will compare three strategies that use a HECM
reverse mortgage for that purpose. I will illustrate with
the case of Mary Jones, who is now 62, owns a house worth
$200,000 and no mortgage, and is worried about her ability
to continue her life style past 82.
Given her age and house value,
Jones can draw a credit line of $96,175 which can generate
income at age 82 in either of two ways. One way is to wait a
year (during which the line will grow to $101,138), and then
purchase a longevity annuity from a life insurance company
that will begin monthly payments at 82 and continue for
life. (The reason for the delay is a HUD rule limiting draws
against credit lines in the first year.) The available
life annuity, obtained from
www.immediateannuities.com,
would be $2812 for a male, $2421 for a female.
As an alternative, Jones could sit on her credit line for 20
years, and then convert it to a monthly tenure payment that
would continue so long as Jones resided in the house. During
the 20 years, the credit line would grow at the mortgage
rate plus the mortgage insurance premium of 1.25%. If rates
stayed where they are today, the tenure payment in 20 years
would be $2685, or about the same as the longevity payments.
But if rates increased, the credit line growth would
accelerate and with it the tenure payment that could be
purchased with the line after 20 years. If the rate over the
20 years was 8%, for example, the available tenure payment
would be $5738, or more than twice as large as the longevity
annuity payment.
While higher interest rates in the future result in tenure
payments larger than longevity annuities, Jones will also
want to consider other important differences between them.
Life Versus Tenure:
Annuities continue until death, which means that Jones could
be in a nursing home indefinitely, yet continue to receive
the annuity. In contrast, tenure payments cease after a year
of nonoccupancy.
Rigidity Versus Flexibility:
Jones must transact the
longevity annuity early, and cannot modify it in response to
changes in her circumstances. In contrast, she can purchase
the tenure payment at any time with the credit line
available at that time. It might be in 5 years or perhaps in
25 years, depending on changes in her circumstances. She can
even give up the idea of converting to a tenure payment
altogether. The flexibility of a credit line is a
doubleedged sword, however, because it allows her to draw
on the line to indulge passing impulses, to the possible
neglect of her longterm goals.
Early Death:
If Jones dies early, the annuity
pays her nothing unless she purchased a death benefit, which
would reduce the annuity payment. With a HECM, however,
Jones’ heirs would receive most of the equity in her house
because credit line growth does not reduce the equity.
Security:
the Federal government guarantees the HECM tenure annuity,
whereas the life company annuity is only as good as the
promise of the insurance company, loosely backed by state
guarantee programs. Defaults on annuities, however, are
extremely rare.
Bottom Line: For most seniors, the tenure payment dominates
the longevity annuity because only tenure payments rise with
future increases in interest rates, the cost of early death
is much smaller, and the borrower can adjust to changing
circumstances. The longevity annuity may be better for the
borrower without the impulse control needed to avoid using
the credit line for nonessentials.
A senior who may not need additional income for 20 years
might decide to wait 20 years before taking out the HECM.
The thought is that she will be older and her house will be
worth more, so she should get a larger payment by waiting.
But the logic is flawed. Waiting will almost certainly
result in a smaller tenure payment.
The reason is that whether Jones takes the HECM now or waits
20 years, the payment she draws in year 20 will be based on
her thencurrent age of 82, but if she draws the HECM now,
she gets the benefit of 20 years of growth in the
credit line. While house appreciation increases draw amounts
for the borrower who waits to take out the HECM, the credit
line for the borrower who takes out the HECM now is
calculated on the assumption that her property will
appreciate by 4% a year.
The numbers tell the story. Assuming interest rates remain
at their current low levels for 20 years, if Jones takes the
HECM now, her payment in 20 years will be $2685. If she
waits 20 years to take the HECM, her payment then will be
$2193 if her house appreciates 4% a year, $982 if it does
not appreciate at all, and $3145 if appreciation is 8%. If
interest rates average 7% over the 20 years, the payment on
the HECM taken now would be $4402, which compares to $2582
on the HECM taken later with 8% appreciation. In short, for
a delay to pay requires a combination of stable interest
rates and rapid house appreciation.
Bottom Line: The best time to take out a HECM credit line is your 62^{nd} birthday. Then take your time and think hard before you use it.
Homeowner of 62 With $200,000 of Home Equity Who Wants an
Income Source at Age 82
Credit Line of $101,138 After One Year Is Used to
Buy a Longevity Annuity Payable in 19 Years 
Annuity is:
$2,812 (for males), $2,421 (for females) 




Interest Rate During 20Year Period 

HECM
Credit Line Drawn Now Sits Unused For 20 Yrs. 
Current (5.16%) 
6% 
7% 
8% 
9% 
Credit Line After 20 Years 
$345,419 
$408,220 
$497,962 
$607,332 
$740,602 
Tenure Payment In Year 20 
$2,685 
$3,369 
$4,402 
$5,738 
$7,461 


HECM
With Tenure Payment Drawn in 20 Years 
Current (5.16%) 
6% 
7% 
8% 
9% 
House
Appreciates 4% 
$2,193 
$1,967 
$1,797 
$1,639 
$1,465 
House
Appreciates 8% 
$3,145 
$2,823 
$2,582 
$2,358 
$2,110 
House
Value Constant 
$982 
$878 
$799 
$725 
$644 
Calculations
assume an, origination fee of $3,000, other closing costs of
$1425, and a ½% upfront mortgage insurance policy.