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Five Ways a HECM Reverse Mortgage Can Ease the Retirement of Homeowners
March 20, 2016

First Way: Use a HECM to Pay Off an Existing Mortgage Carrying a Monthly Payment 

Many homeowners today choose to retire, or are obliged to, before they have fully paid off their mortgage. With their income reduced, the required monthly mortgage payment can become heavily burdensome.   

If the balance is not too large relative to the value of the home, it can be paid off with the proceeds of a HECM reverse mortgage, which has no required payment. If the borrower is 62, the balance of the old mortgage can't exceed 50% of the value of the home; the cutoff rises to about 68% for a borrower of 87. For more values, see Table 1 below.

The conversion of a standard mortgage to a reverse mortgage is not for everyone. See Transitioning From a Standard Mortgage to a Reverse Mortgage: A Bad Idea For Some, A Good Idea For Others.  

Table 1

The Largest Old Mortgage Balance That Can Be Repaid in Full With a HECM Reverse Mortgage, March 11, 2016  

Current Property Value

Age of Borrower

62

67

72

77

82

87

$100,000

$48,475 FRM

$51,675 FRM

$55,175 FRM

$59,175 FRM

$63,475 FRM

$67,975 FRM

$200,000

$99,389 FRM

$105,789 FRM

$111,820 FRM

$120,989 FRM

$129,589 FRM

$138,689 FRM

 $300,000

$149,496 FRM

$155,180 ARM

$165,180 ARM

$177,680 ARM

$190,580 ARM

$204,080 ARM

$400,000

$195,480

ARM

$208,280 ARM

$222,280 ARM

$243,196 ARM

$260,596 ARM

$278,796 ARM

 

Second Way: Use a HECM Term Payment to Delay Taking Social Security  

For most seniors, waiting until age 70 before collecting social security, as opposed to taking a smaller amount earlier, is an excellent investment. A typical senior who could draw $1350 a month at age 62, would see the draw increase to $2376 at age 70. Yet more than 2 of every 3 workers eligible for social security take it early. One major reason is that they are short of income. This can be remedied if they are homeowners with equity.   

Not that much equity is needed. If the borrower is 62, a monthly payment of $1,000 covering the 8 years until age 70 is available with equity of $155,000. At age 67, when the payment term is only 3 years, the required equity is only $66,000. If the borrower has more equity than is needed, all the better, it can be drawn on to meet other needs as they arise.   

Table 2

 Home Equity Required to Produce HECM Monthly Term Payments of $1,000 For the Period Until Borrower Reaches Age 70

 March 11, 2016

Age of Borrower

62

63

64

65

66

67

Term of HECM

8yrs

7yrs

6yrs

5yrs

4yrs

3yrs

Estimated Home Equity Required For Monthly Term Payment of $1,000

$155,000

$138,000

$121,000

$104,000

$85,000

$66,000

 

Third Way:  Increase Monthly Income During Lifetime in House

The most straightforward remedy for inadequate income is what is called a “tenure” payment, which is a monthly payment that runs as long as the borrower resides in the house. The payment varies with the property value, the borrower’s age, and interest rates when the mortgage is taken out. On March 11, 2016, the tenure payment ranged from $266 for a borrower of 62 with a house worth $100,000, to $2582 for a borrower of 87 with a house worth $400,000.

Table 3

Largest Monthly Tenure Payment From a HECM Reverse Mortgage

March 11, 2016  

Current Property Value Less Balance on Old Mortgage

Age of Borrower

62

67

72

77

82

87

$100,000

$266

$296

$334

$391

$476

$622

$200,000

$551

$611

$690

$804

$977

$1276

 $300,000

$835

$925

$1045

$1217

$1478

$1928

$400,000

$1120

$1240

$1401

$1630

$1979

$2582

  

Fourth Way: Accumulate a Financial Reserve as Protection Against the Risk of Outliving Your Money

Seniors who accumulate a nest-egg during their working years which they then use to maintain their lifestyle during retirement may be at risk of running out of money if they live too long. Even if the probability of that happening is low, no one wants to live with a low probability of becoming destitute. Seniors who own homes, however, have a way to insure against that outcome. If they take a HECM credit line and let it sit unused, the line grows over time. The longer they live in their house, the larger will be their unused line.

For example, a senior of 62 with a house worth $200,000 qualifies for an initial HECM credit line of $48,000. If interest rates remain stable, the line will grow to $157,000 in 20 years. If interest rates increase and the borrower selected a mortgage with a 5% adjustment cap, the line in 20 years would be $355,000. If the borrower had selected an ARM with a 10% adjustment cap, and rates increase by the maximum allowed, the line after 20 years would be $752,000.  

Table 4

Future Credit Lines on a HECM Reverse Mortgage Available to a Borrower of 62 With a Home Currently Worth $200,000

March 11, 2016

Unused Credit Line

Within First Year

In 5 Years

In 10 Years

In 15 Years

In 20 Years

In 25 Years

ARM 1: Stable Interest Rates

$48, 000

$65,000

$87,000

$117,000

$157, 000

$211,000

ARM 1: Maximum Allowable Interest Rates

$48,000

$75,000

$125,000

$211,000

$355,000

$662,000

ARM 2: Stable Interest Rates

$48,000

$63,000

$83,000

$110,000

$146,000

$194,000

ARM 2: Maximum Allowable Interest Rates

$48,000

$87,000

$179,000

$367,000

$752,000

$1,540,000

Note: Each stated credit line assumes no prior usage. ARM 1 has an initial rate of 4.194% and a maximum rate of 9.194%. ARM 2 has an initial rate of 3.188% and a maximum rate of 13.188%.  

Fifth Way: Downsize by Purchasing a House Using a HECM to Minimize Asset Liquidation

Many home purchasers are seniors who already own homes but want a change. They may want a house in a different location, and in many cases they want to downsize, both the physical house and the financial burdens that come with it. A HECM reverse mortgage can facilitate this process by funding part of the cost, which reduces the need to liquidate other assets, without imposing a monthly payment obligation.

For example, a senior of 62 purchasing a $200,000 home could obtain up to $98,375 with a HECM. This reduces the amount that must be obtained from asset liquidation and other sources to $101,625. A purchaser of 82 could obtain up to $128,375 with a HECM, reducing asset liquidation to $71,625.

Table 5

Funding a $200,000 House Purchase With a HECM Reverse Mortgage

Source of  Funding

Age of Borrower

62

67

72

77

82

Low Mortgage Insurance Premium

HECM

$60,455

$64,295

$68,495

$73,295

$78,455

Asset Sales & Other Sources

$139,545

$135,705

$131,505

$126,705

$121,545

 

High Mortgage Insurance Premium

HECM

$98,375

$104,775

$111,775

$119,775

$128,375

Asset Sales & Other Sources

$101,625

$95,225

$88,225

$80,225

$71,625

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