August 16, 2017, revised January 22, 2021
The secret is to shop for exactly what you need, based on
your retirement objective. I call these needs “decision
variables”, and the major ones are shown in the table along
with the retirement objectives to which they apply.
For example, the senior whose major objective is to increase
current and future income as much as possible will shop for
the largest monthly tenure payment, which is paid as long as
she resides in the house. If the senior has a concern about
the size of her estate, she will also look for the HECM that
results in the smallest future debt. Since it is unlikely
that the HECM that generates the largest tenure payment also
results in the smallest future debt, the senior has to
decide which variable has priority.
This example illustrates why the list of decision variables
does not include the interest rate and origination fee. A
higher interest rate results in a larger monthly tenure
payment, and also a larger future debt. Whether or not a
borrower finds a higher rate attractive or unattractive,
therefore, depends on which of the two decision variables
carries the greater weight.
Every one of the 10 retirement objectives shown in the table
has 2, and in some cases 3 decision variables. There is
nothing unusual or problematic about that, juggling
conflicting decision variables is what consumers do all the
time. When I bought my last car there were at least 8
decision variables that I considered, and my wife complained
that I gave greater weight to the quality of the sound
system than to the comfort of the rear seats.
The credit line is a uniquely valuable feature of a HECM
reverse mortgage, and figures prominently in the table of
retirement objectives and decision variables.
- Some seniors want to use all their borrowing power to
acquire a credit line, which they can use at any time for
any purpose (Objective 8). They would shop for the largest
initial credit line, subject to possible concerns about
- Seniors with an existing mortgage balance that must be
paid off with a HECM may elect to use any excess borrowing
power as a credit line (Objective 4). They would also shop
for the largest initial credit line.
- Other seniors prefer to divide their borrowing power
between drawing a fixed monthly payment and holding a credit
line (Objective 2). They would shop for either the largest
initial credit line assuming a specified monthly payment, or
the largest payment given a specified credit line.
- Seniors whose major concern is that they will outlive their
financial assets will view a credit line as a type of
insurance policy, activated only if necessary (Objective 7).
They would shop not for the largest initial line but for the
largest line after a considerable period, depending on their
age. The HECM that provides the largest initial line may not
be the one that provides the largest future line.
Seniors with well-formulated retirement objectives can use
my kosher HECM reverse mortgage calculator to find the
relevant decision variables for HECMs offered by multiple
competing lenders. If they don’t know what their needs are,
however, the calculator won’t do them much good. It has
become increasingly evident to me that many if not most
homeowners in or approaching retirement do not have a
retirement plan. While there are several retirement
calculators available to seniors, none of them incorporate
HECMs. Hence, my colleagues and I decided to build our own.
Retirement Finance in a Low Interest Rate Economy
HECM Reverse Mortgage Decision Variables of Ten Retirement