Among the challenges faced by seniors considering a HECM reverse mortgage is deciding which HECM best meets their needs. There are both fixed-rate and adjustable-rate versions, adjustable rate HECMs can adjust annually with a maximum rate increase of 5%, or monthly with a 10% maximum, and within all of these categories, there are multiple combinations of interest rate and origination fees.
The specific HECM that works best depends on the senior’s financial needs and preferences. The list below covers 5 different financial needs, and shows the manner of drawing funds under the HECM that corresponds to each need. I will discuss the HECM selection process in each case.
HECM Draw That Meets Need
1. Need a reserve for contingencies, including the possibility of outliving your money by living too long
Draw the largest possible initial or future credit line, with or without a cash draw.
2. Inadequate income, now and in the foreseeable future
Draw the largest possible monthly payment for as long as you live in the house.
3, Have an immediate need for cash for any purpose except buying a house.
Draw as much cash as possible, at closing or after 12 months.
4. Need a reserve for contingencies and more current income
Draw a smaller monthly payment plus the largest possible credit line.
5. Purchase a house with the smallest possible cash outlay.
Draw as much cash as possible, at closing.
The senior who focuses on the largest initial line could find it on either an annual or a monthly adjustable. If they focus on the largest line at some future time, they will select the annual adjustable, unless they are convinced that rates will rise by more than 5% above existing levels, in which case they might select the monthly adjustable.
Note that seniors selecting among alternative credit lines
can ignore the interest rate and origination fee, which are
important to them only because they affect credit lines.
This is also the case for the other financial needs
Permanent Increase in Monthly
Payment: Some seniors want
more income “permanently,” meaning for as long as they
occupy their homes. The logical choice would be the
adjustable-rate HECM that provides the largest such payment.
However, seniors concerned with how much home equity they
will leave to their estate might select the HECM that
minimizes future debt.
Some seniors need cash for any of
the plethora of reasons why people need cash. Home purchase
is excluded, however, because it is considered as a separate
Seniors can obtain cash at closing with either a fixed-rate
or an adjustable-rate HECM. While the amounts available are
very similar, the cash draw at closing ends the process for
the fixed-rate option. No additional funds can ever be
drawn. With the adjustable, in contrast, a second cash draw
is available after 12 months roughly equal to about 2/3 of
the draw at closing. A senior looking for the maximum cash
over 12 months will take the adjustable offering the largest
total. A senior with more modest needs with a concern about
the size of her estate might prefer the fixed-rate version
that results in the greatest equity after some period.
Combination Monthly Payment
and Credit Line: Some
seniors want both a monthly payment and a credit line. They
will specify their desired payment, which could be for their
entire tenure in the house or for a shorter period, and use
the remainder of their borrowing power to draw a credit
line. They will select the adjustable-rate HECM that
provides either the largest initial line or the largest line
after some period – the same decision process as when they
select a credit line only.
Purchase a House:
Most seniors who purchase a house with a HECM want to
minimize the asset liquidation needed for the purchase, so
they want the HECM that will provide the largest amount of
cash up front. This could be a fixed-rate or an adjustable
rate, but with interest rates moving up, it is more likely
to be an adjustable. In both cases, the senior pays a 2.5%
insurance premium for the privilege of using all HECM
borrowing power at the outset.
The senior willing to draw less than 60% of the maximum on an adjustable will pay only a 0.5% premium and will obtain a significant credit line that becomes useable after 12 months.
Concluding Comment: The kosher reverse mortgage calculator shows all the options discussed above, enabling seniors to make the best possible selection - see Kosher HECM Cakculator. For example, the calculator shows the senior looking for a reserve for contingencies the largest initial credit line available, and also the largest future line after some period of non-use, which period the senior can specify. Defining all relevant options is one feature that makes the calculator kosher. A second kosher feature is that the calculator covers multiple lenders, which allows the senior to find more advantageous terms. In each of the financial needs considered above, one or two lenders offer better deals than the others.