Using a HECM Reverse Mortgage to Remove an Existing Monthly Payment Burden

April 17, 2015

Seniors who retire while they are still making monthly payments on a home mortgage may face severe financial strain. In many cases, the strain can be relieved by paying off the existing mortgage with proceeds from a new HECM reverse mortgage that has no required payment. This article explains how to do it, using the professor’s HECM calculator.

Step 1: Enter Information About You and Your House

You begin by entering the information requested, including the current balance of your existing mortgage. You also indicate that you are borrowing against your existing house, not purchasing a new 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 you still have a question, contact the professor.

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

Step 2: Select the Type of Reverse Mortgage

Step 2 shows the amounts you can draw as cash, credit line or monthly income in addition to repaying your current mortgage. It also shows the HECM charges on both fixed-rate and adjustable rate HECMs. Note that fixed-rate HECMs allow only upfront cash draws.

In some cases, you will also have a choice between a low and a high upfront mortgage insurance premium. The upfront mortgage insurance premium is set by FHA. The premium is ½% of property value if the initial loan amount (financed settlement costs plus existing mortgage loan balance and other mandatory upfront expenses) is no more than 60% of total borrowing power. Above 60%, the premium is 2.5% of property value.

Note that the amounts you can draw as cash, credit line or monthly income are the maximums available in each case, assuming that the other two draws are zero. You can mix and match your draw options as you please at Step 3.

Click on a "Select Adjustable Rate" or a "Select Fixed Rate" button at the bottom to go to Step 3.

Step 3: Select the HECM Payment Options

When you first enter, the amount of the available credit line is shown, assuming zero cash draws and zero monthly payments. If you are satisfied to repay your mortgage and don’t want to receive anything more at this time, skip right to the bottom and click on "Select Lender and Price."

If you want cash or a monthly payment, enter the amounts desired up to the maximums indicated. You can add or subtract cash and income draws until you find the combination of draws that fits you best. You can also see financial projections for any combination you choose. When you are satisfied with the combination of draw options, click on "Select Lender and Price."

Step 4: Select Lender and Price

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. 

Borrowers who fall between these polar cases will be concerned with both future debt and future credit lines. They may also be interested in their conversion options – their right to convert a credit line to a monthly payment, along with the reverse. They can see their conversion options by clicking on See All Features For All Years.

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.

Want to shop for a Reverse Mortgage from multiple lenders?

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