December 1, 2003, Reviewed December 2, 2008, January 26, 2010, January
13, 2013, March 6, 2017
“I was my aunt’s only relative, and when she died I was surprised to
inherit a house worth $250,000, with reverse mortgage debt of only
$90,000. I had encouraged her to exhaust the equity in her house, and
she always told me that she was using it as fast as the program would
allow. Could that have been true?”
It is possible. It is also possible she was stringing you along because
she wanted to leave you something. You will never know.
FHA’s Home Equity Conversion Mortgage (HECM) is an excellent product for
elderly homeowners who need additional cash. HECM allows the owner to
draw on a line of credit, receive a monthly payment for as long as she
remains in the house, or receive a payment for a specified term. The
debt need not be repaid until the owner dies, sells the house, or moves
A weakness of the HECM, however, is that it is extremely difficult to
use up all or even most of your equity – house value less mortgage debt.
This is great for heirs, but not so great for seniors who want to get as
much money as possible out of their house, and don’t care about leaving
anything to their heirs.
The amount of equity a homeowner with a HECM leaves in her estate
depends in part on how long she is in the house after the contract is
closed. The earlier it is terminated, the smaller the debt and therefore
the greater the equity. The owner may have little control over this.
A second factor, which the owner does have control over, is the payment
option selected. Assuming the contract terminates before the owner
reaches age 100, she will leave the least equity to her estate if she
draws as much cash as possible at the outset or takes a credit line and uses it up in a short period, e.g., 2 years. If
she converts the line into a monthly payment for a term longer than 2
years, she will leave more equity. If she takes a tenure payment that
continues for as long as she lives in the house, she will leave the most
equity. However, if she stays in the house alive and kicking until age 100, the
will be the same for all the options.
A third factor is the appreciation in the value of the property after
the HECM is taken out. Such appreciation affects the size of the estate
but not the amounts that the owner can draw under that contract. HUD
assumes all properties appreciate 4% a year in calculating draw amounts.
The fourth factor is whether the value of the property at the time the
HECM was taken out was higher than the FHA loan limit. If it was, the
credit line was based on the loan limit, and the excess value lands in
the estate as additional equity. However, this excess value along with
subsequent appreciation could make it worthwhile to refinance the HECM,
as indicated in Can a HECM Be
Seniors interested in a reverse mortgage can learn
about the various HECM options for drawing funds, and see how much they
can draw under each option from lenders certified by the professor, by