The first
article in this series looked at the various reasons many
HECM borrowers make bad choices. One important reason is
that they don’t fully understand the longerrun consequences
of the various HECM options that are available. That is the
subject of this article.
The different HECM payment options can be viewed as
different ways that seniors can use the borrowing power of
their homes. Total borrowing power depends on the property
value, the age of the youngest coborrower, and the expected
interest rate and upfront fees on the HECM. The senior can
use her borrowing power to withdraw cash, purchase an
annuity, reserve a credit line that grows larger as long as
it is not used, or some combination of the three.
Table 1 shows the maximum amounts
that a 72year old with a $400,000 house can draw using her
full borrowing power for each of the options. She can
withdraw cash of $257,000, purchase a tenure annuity which
pays $1433 a month so long as she lives in the house, or a
term annuity for a shorter period, such as the 5, 10 and
15year periods shown in the table.
HECM Maximum Payment Options 
Loan Balance 

At Closing 
After 5 Years 
After 10 Years 
After 15 Years 
After 28 Years 

Upfront Cash of $257,000 
$271,000 
$349,000 
$451,000 
$582,000 
$1,129,000 
Monthly Payment of $4839 for
5Years 
$14,000 
$349,000 
$451,000 
$582,000 
$1,129,000 
Monthly Payment of $2726 for
10Years 
$14,000 
$205,000 
$451,000 
$582,000 
$1,129,000 
Monthly Payment of $2037 for 15
Years 
$14,000 
$158,000 
$343,000 
$582,000 
$1,129,000 
Monthly Tenure Payment of $1433 
$14,000 
$116,000 
$248,000 
$418,000 
$1,129,000 
Note: Payment amounts are based on an
expected interest rate of 3.86% plus a mortgage insurance
premium of 1.25%, debt and unused credit line are calculated
at the current ARM rate of 2.497% plus 1.25%,, financed
closing costs are $14,000. Data are as of July 28, 2012.
Seniors who elect to take less than the
maximum of whatever option they select, reserve the
remainder of their borrowing power for future use. This is
illustrated in Table 2 below, which applies to the same
senior as Table 1 but assumes that only about half of her
borrowing power is used upfront. That reserves a credit line
of $128,000 which if not drawn on grows larger each year.
Table 2. Credit Lines and
Future Debt For a Senior of 72 With House Valued at
$400,000, When Senior Draws Half of Maximum Cash, 5Year and
Tenure Options
Half of HECM
Maximum Payment Options 
Loan Balance/Credit
Line 

At Closing 
After 5 Years 
After 10 Years 
After 15 Years 
After
28 Years 

Upfront Cash of
$129,000 
$143,000/ $128,000 
$184,000/ $166,000 
$237,000/ $212.000 
$305,000/ $273,000 
$590,000/ $527,000 
Monthly Payment of
$2420 for 5Years 
$14,000/ $128,000 
$184,000/ $166,000 
$237,000/ $214,000 
$306,000/ $276,000 
$594,000/ $535,000 
Monthly Tenure
Payment of $716 
$14,000/ $128,000 
$67,000/ $166,000 
$136,000/ $214,000 
$224,000/ $276,000 
$593,000/ $535,000 
The senior who takes out a HECM is free to
switch to another option at any time for a fee of $20. For
example, the borrower who draws less than the maximum cash
at the outset could draw a tenure annuity at any point based
on her unused credit line and age at that point. In some
cases, furthermore, seniors can advantageously modify the
terms of an existing option, even when they have no unused
credit under that option. For example, the senior in
Table 1 who drew the maximum tenure annuity could convert to
a new tenure annuity at the end of 5 years that would raise
the payment from $1433 to about $1566. Program modifications
are a powerful but little understood feature of the HECM
program.