Many senior homeowners are attracted to the idea of using a
reverse mortgage to draw additional funds, but are so
fearful of making a costly mistake involving their house, or
being taken advantage of by loan providers, that they are
immobilized and do nothing. The 3-step strategy described
below is directed to them. It is risk-free because all three
steps can be done without contacting a lender, using the
HECM calculator on my web site, which was recently
redesigned for this purpose.
1.
Identify your financial needs that
might be met by a HECM.
2.
Determine whether the amounts you
can draw with a HECM, immediately or in the future, justify
the decline in your home equity.
3.
Narrow the selection by comparing
price quotes from different lenders, and different
combinations of interest rate and origination fee.
If you take
the three steps and decide a HECM is not for you, that is
the end of it – no loan providers will call. If you decide
to proceed, you can contact a lender with the confidence
that comes from knowing exactly what your options are, and
which options you want.
In counseling
seniors about HECM reverse mortgages, I have found that they
fall into 5 groups that have different financial objectives.
Each of these groups requires different information to make
good decisions. This information includes financial
projections of future HECM debt, unused credit lines, and
other factors over periods that are relevant to each
individual borrower. Because none of the HECM calculators
available on the internet provided this capacity, my
colleagues and I decided to build it into ours.
The different
financial objectives are as follows:
Draw the largest possible
initial or future credit line, with or without a cash
draw.
Draw the largest possible
monthly payment for as long as you live in the house.
Draw as much cash as possible,
at closing or after 12 months.
Draw a smaller monthly payment
plus the largest possible credit line.
Purchase a house with the
smallest possible cash outlay.
I am going to illustrate Steps 2 and 3 for a 65-year old named Smith who has a house worth $400,000, who wants the largest possible credit line and is looking ahead 10 years. The credit lines calculated at Step 2 are based on prices posted on my web site by the lender whose HECM generated the lowest debt after 10 years of any of the lenders who price HECMs on my site. With this HECM, Smith could have obtained an initial credit line of $210,000, which if unused would grow to $330,000 in 10 years at current interest rates, and to $496,000 at the maximum rate on the HECM. The cost, measured by how much Smith would owe after 10 years in the absence of any draws, is $11,000 at current rates, $17,000 at the maximum rate.
Jones is the
same age as Smith and her property value is the same, but
Jones wants to use her borrowing power to draw the largest
possible monthly stipend starting immediately, and lasting
as long as she lives in her house. This is called a “monthly
tenure payment.” Jones wants to measure the cost of a HECM
over 15 years rather than 10.
On September
3, the monthly payment on a HECM that would have resulted in
the lowest debt after 15 years was $939. At current rates,
she would owe $253,000. Assuming that Jones considers this
a good deal, she should proceed to Step 3 and see if there
isn’t another deal that would be more advantageous. Among
the possibilities is a tenure payment of $1161 that would
generate a debt of $364,000 over 15 years. It is for Jones
to decide whether an additional $222 a month was worth an
additional $111,000 of future debt.
I am not covering the remaining three categories of financial need because I don’t have the space, besides which it would be heavily repetitious. The important points are, first, that no matter what financial need category a senior falls into, a decision to take a HECM reverse mortgage or not should be data-based and include information about what is likely to happen in the future. Second, seniors who elect to go ahead with a HECM have options, and the more lenders from whom they obtain price quotes, the more options they have. But again, to select wisely from among their options, borrowers need information about what is likely to happen in the future. To my knowledge, such information is available only on my HECM calculator.