Using a HECM Reverse Mortgage as a Buffer Against a Future Income Shock

April 26, 2015

The professor’s HECM reverse mortgage calculator is designed to show how much you can draw on a HECM reverse mortgage in upfront cash, monthly payment and unused credit line, individually or in a combination of your choosing. It also shows the implications of any selection for your future finances, and guides your selection of the loan provider offering the best deal.

This article explains how to use the calculator to assess the use of a HECM as a buffer against a possible future income shock. Some seniors are vulnerable to a drastic drop in their income late in their retirement years. One such shock can arise when a couple is heavily dependent on the income received from a pension paid to one of them, which will cease when that person dies. The HECM then replaces the lost income for the survivor.

Another type of shock can arise when seniors who depend heavily on drawing down financial assets to meet living expenses are so long-lived that they outlive their assets. Financial planners set up asset utilization schemes in such a way that the probability of running out of money is very low, on the order of 2-5%. Nonetheless, it can and does happen, and the possibility that it might happen can be a major source of anxiety.

The core of a HECM program to nullify this danger is the unused credit line, which becomes increasingly large the longer the senior lives. If a pension abruptly terminates, or if assets become fully depleted, the senior has a large HECM credit line on which to draw. If the senior dies before such shock occurs, which is the most likely outcome, the credit line is not used and most of the equity in the house is retained by the estate.

Step 1: Enter Information About You and Your House

You begin by entering the information requested. Make sure you answer the first question as “Borrow Against My Current House.” The accuracy of the calculator results depends upon the accuracy of the information you enter. If you have a question about any of the entries, place your cursor over the question mark. If the popup you get doesn’t answer your question, contact the professor.

When finished, click on “Continue to Step 2”.

Step 2: Select the Type of Reverse Mortgage

Scroll down to the bottom of this page and click on "Select Adjustable Rate", since credit lines are available only with adjustable rates. In some cases, there will be two adjustable rate options, one with a lower mortgage insurance premium than the other. In this case, select the option with the lower premium because it will generate a larger future credit line.

Step 3: Select the HECM Payment Options

On this page, you enter your desired payment options. If you don't want any cash upfront or a monthly payment, you nee3d only to scroll to the bottom and click on "Select Lender and Price".

Step 4: Selecting the Best Deal

The reverse mortgage market in general is very poorly organized with wide variations in lending margins and quality of service. Almost all seniors take their HECM from the one loan provider they contact, or the one who contacted them. There is virtually no price shopping.

In contrast, the loan providers who post their prices on this site understand that their prices are being compared to others, which means that their prices must be competitive if they hope to be selected. Furthermore, the loan providers listed have all been certified by the professor, which means among other things that they are being monitored to prevent any unjustified last-minute price increases.

Nonetheless, the decision may not be easy. The choices offered to you here may differ by 1) Lender, 2) Interest rate, 3) Origination fee, 4) Credit line, 5) Future Loan Balance and 6) Future Credit Line. Of these, the last two are the most important. One polar case is where the period is relatively short, say 5 years or so, and the borrower expects to sell the house at that time. In this situation, the borrower should select the HECM that will have the smallest loan balance at the end of the period.

The second polar case is where the period is relatively long, say 15 years or more, with the borrower expecting to stay as long as possible and having no concern about the value of her estate. In this situation, the borrower will be indifferent to the loan balance and will favor the HECM that provides the largest future credit line.

Few seniors know how long they will have the HECM, but make your best guess. The calculator makes it easy to change the period and observe how the change affects future cost and future credit line.

When you have made your decision, click on “Select’, which allows you to send your information to the selected lender – and only that lender – with an invitation to contact you.

 

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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