That seems to be a fear of many seniors, who are caught in a
conflict between wanting to provide a bequest to their
family when they die, and wanting to enhance their own lives
in the meantime. The fact is, however, that the HECM program
is designed to serve both objectives. While a HECM
necessarily reduces the home equity that becomes available
to the borrower’s estate, in most cases it does not absorb
all the equity. Furthermore, and this is the critical point,
seniors have discretion with regard to the amount of home
equity that is used to meet their own needs, and the amount
that is retained for their heirs.
Unfortunately, in most cases they don’t use that discretion
because they have no idea how their selection of HECM draw
options will affect the equity that will remain for their
heirs. Recently, however, my Kosher HECM calculator was
upgraded to generate that information. The calculator now
estimates the equity that will accrue to the borrower’s
estate for any combination of draw options the senior
selects.
This is illustrated by the attached table, which assumes a
hypothetical senior of 65 who owns a debt free home worth
$400,000. In Case 1, I assume she has enough income to meet
her recurring needs, but is anxious about the possibility
that she may face heavy medical expenses down the road. She
selects a credit line which grows at the same interest rate
as the HECM so long as it is not used. After 10 years, the
line has grown to $376,000, at which point she owes only
$10,000 – consisting of her HECM settlement costs plus 10
years of interest.
Parenthetically, this use of a HECM as an insurance policy
against unknown contingencies has got to be the best bargain
available in financial markets. If the senior never has to
use the policy, all her home equity except the
inconsequential amount she owes on the HECM will go to her
heirs. And if she does need to draw on the credit line to
pay her bills, no one will question the decision.
In Case 2, I assume that the senior has significant unmet needs right now, and draws the maximum amount of cash available to her at closing, which is $124,460. (A second installment becomes available to her after 12 months, but I assume she has no need for it and allows it to grow unused). This sizeable advance results in a significant loan balance, which reduces but does not eliminate the home equity that will become available to her heirs. If she dies after 30 years, her estate will owe $509,000 but it will realize $1.3 million on the sale of the home.
In Case 3, I assume that the senior must supplement her
income, and elects to draw the maximum monthly tenure
payment of $1068. In this case, her equity is higher than in
Case 2 in the early years, but it becomes lower as the years
go by.
In Case 4, she draws a payment of $3900 for 5 years only.
Her equity is the lowest of all the cases, but it remains
positive.
The calculator works just as well when the senior selects a
combination of options. To illustrate that point, Case 5
assumes an upfront cash draw of $30,000, a monthly tenure
payment of $500, and a credit line of $74,000.
The figures for home equity are, of course, estimates. They
are based on the assumption that the property will
appreciate at 4% a year, which has been the average over a
very long period and is the figure used by HUD in setting
draw amounts. Obviously it may not apply to any shorter
period or to any particular house. And of course, equity
varies with the senior’s mortality, which is why we
programmed the calculator to compute the results for every
year until age 100.
Forecasting the future is always subject to error, but
forecasts based on the best possible information will turn
out better than those based on hunch and surmise.
Equity Retention With a HECM Adjustable Rate Reverse Mortgage on March 7, 2016
(Borrower of 65 With a Home Worth $400,000 Initially, and No Existing Mortgage)
Draw Options Exercised by Borrower 
Future Credit Line 
Future Loan Balance 
Future Home Value 
Future Equity in Home 
Case 1: Retention of Maximum Credit Line, Borrower Draws No Cash or Monthly Payments 




After 10 Years 
$376,000 
$10,000 
$592,000 
$582,000 
After 20 Years 
672,000 
18,000 
876,000 
859,000 
After 30 Years 
1,200,000 
32,000 
1,297,000 
1,265,000 





Case 2: Borrower Draws Maximum Upfront Cash of $124,460 




After 10 Years 
136,000 
204,000 
592,000 
388,000 
After 20 Years 
215,000 
323,000 
876,000 
554,000 
After 30 Years 
339,000 
509,000 
1,297,000 
788,000 





Case 3: Borrower Takes Maximum Monthly Tenure Payment of $1068 




After 10 Years 
0 
177,000 
592,000 
415,000 
After 20 Years 
0 
461,000 
876,000 
415,000 
After 30 Years 
0 
932,000 
1,297,000 
365,000 





Case 4: Borrower Takes Maximum Monthly Payment For 5 Years of $3900 




After 10 Years 
0 
357,000 
592,000 
250,000 
After 20 Years 
0 
590,000 
876,000 
337,000 
After 30 Years 
0 
973,000 
1,297,000 
446,000 





Case 5: Borrower Takes $30,000 in Cash, $500 Monthly Tenure Payment, and $74,000 Credit Line 




After 10 Years 
117, 000 
134,000 
592,000 
458,000 
After 20 Years 
185,000 
288,000 
876,000 
588,000 
After 30 Years 
292,000 
531,000 
1.297,000 
766,000 