RFI User Guide - HECM Credit Line for Planned Financing of Spendable Funds

 

RFI - HECM Credit Line for Planned Financing of Spendable Funds

("CL / All in")

 

For retirees who have both significant financial assets and equity in their home, a HECM Credit Line can be used as a "backup" to augment spendable funds in the event that the return realized on their portfolio drops below the return assumed.

Unfortunately, many retirees have little or no financial assets. However, many retirees in this group do have substantial equity in their home which can be tapped to provide retirement income by taking out a HECM Reverse Mortgage.

One option for a retiree in this situation is to use the HECM tenure payment option, which provides a fixed monthly payment to the retiree for as long as they live in their home.  However, RFI provides a superior option: using the HECM's borrowing power to (a) purchase a deferred annuity with an initial cash draw, and (b) funding monthly spending during the annuity deferment period using the HECM credit line.

To illustrate this concept, we define a borrower of age 63 with no financial assets and a home valued at $700,000 with no outstanding mortgage. We then define three scenarios: (1) HECM tenure payment, (2) RFI "CL / All In" with a constant 2% annual increase in spendable funds, and (3) RFI "CL / All In" with fixed spendable funds. In Scenarios 2 and 3 a portion of the HECM "borrowing power" is used to purchase a 10 year deferred annuity.  The RFI scenario definition table looks like this:

When the scenarios are calculated we get a projected spendable funds chart as follows:

In this comparison the lower light red line is the HECM tenure payment, the darker red line is the fixed payment RFI scenario, and the green line is the RFI scenario with a 2% annual "inflation" increase.

There are several things to note on this chart:

In addition, an RFI plan which includes a deferred annuity has another significant advantage over the HECM tenure payment in isolation. The annuity continues generating income as long as the retiree is alive, while the HECM tenure payment stops if the retiree moves out of their home.

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