Shopping effectively for a HECM means comparing the metric of concern to the borrower, such as the largest possible credit line or the smallest possible future debt.

Shopping Effectively for a HECM Reverse Mortgage
Shopping effectively for a HECM means comparing the metric of concern to the borrower, such as the largest possible credit line or the smallest possible future debt.
August 16, 2017

The secret is to shop for exactly what you need, based on your retirement objective. I call these needs “decision variables”, and the major ones are shown in the table along with the retirement objectives to which they apply.

For example, the senior whose major objective is to increase current and future income as much as possible will shop for the largest monthly tenure payment, which is paid as long as she resides in the house. If the senior has a concern about the size of her estate, she will also look for the HECM that results in the smallest future debt. Since it is unlikely that the HECM that generates the largest tenure payment also results in the smallest future debt, the senior has to decide which variable has priority.

This example illustrates why the list of decision variables does not include the interest rate and origination fee. A higher interest rate results in a larger monthly tenure payment, and also a larger future debt. Whether or not a borrower finds a higher rate attractive or unattractive, therefore, depends on which of the two decision variables carries the greater weight.

Every one of the 10 retirement objectives shown in the table has 2, and in some cases 3 decision variables. There is nothing unusual or problematic about that, juggling conflicting decision variables is what consumers do all the time. When I bought my last car there were at least 8 decision variables that I considered, and my wife complained that I gave greater weight to the quality of the sound system than to the comfort of the rear seats.

The credit line is a uniquely valuable feature of a HECM reverse mortgage, and figures prominently in the table of retirement objectives and decision variables.

  • Some seniors want to use all their borrowing power to acquire a credit line, which they can use at any time for any purpose (Objective 8). They would shop for the largest initial credit line, subject to possible concerns about future debt.
  • Seniors with an existing mortgage balance that must be paid off with a HECM may elect to use any excess borrowing power as a credit line (Objective 4). They would also shop for the largest initial credit line.
  • Other seniors prefer to divide their borrowing power between drawing a fixed monthly payment and holding a credit line (Objective 2). They would shop for either the largest initial credit line assuming a specified monthly payment, or the largest payment given a specified credit line.
  • Seniors whose major concern is that they will outlive their financial assets will view a credit line as a type of insurance policy, activated only if necessary (Objective 7). They would shop not for the largest initial line but for the largest line after a considerable period, depending on their age. The HECM that provides the largest initial line may not be the one that provides the largest future line.

Seniors with well-formulated retirement objectives can use my kosher HECM reverse mortgage calculator to find the relevant decision variables for HECMs offered by up to 9 competing lenders. If they don’t know what their needs are, however, the calculator won’t do them much good. It has become increasingly evident to me that many if not most homeowners in or approaching retirement do not have a retirement plan. While there are several retirement calculators available to seniors, none of them incorporate HECMs. My colleagues and I have decided that that is our next major project.

HECM Reverse Mortgage Decision Variables of Ten Retirement Objectives HECM Reverse Mortgage Retirement Objectives

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