HECM Reverse Mortgage, Tenure Payment

Using a HECM Reverse Mortgage to Obtain a Tenure Payment
Using a HECM Reverse Mortgage to Obtain a Tenure Payment

April 15, 2015

A tenure payment is one way in which you can draw funds under a HECM reverse mortgage. It is a monthly payment that continues for as long as you reside in your home, regardless of how long that is.

You can use all your borrowing power on the tenure payment, or you can take less than the maximum and use the remainder to draw cash upfront, and/or to hold a credit line for future use. The calculator will show how much of each you can draw, 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 lender offering the best deal.

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

At this point, you see what your borrowing options are: how much cash you can draw, the credit line available to you, and the monthly payment for as long as you live in the house or for the shorter period you entered at Step 1

The interest rates and origination fees shown at the bottom are the lowest of those set by the lenders reporting their rates and fees to the professor. However, because monthly payments are available only on adjustable rate HECMs, the price differences between fixed and adjustable-rate HECMs do not affect your decision process. 

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.

Other settlement costs are set by title companies, appraisers and other providers of services required in a HECM transaction.

To anticipate a frequently-asked question, you cannot take a monthly payment with an adjustable rate and a cash draw with a fixed rate.  HECMs must be 100% adjust able rate or 100% fixed-rate. So scroll to the bottom of the page and click on “Select Adjustable Rate.”

Step 3: Select the HECM Payment Options

On this page, you enter your desired payment options.  It keeps a running tab of your desires at the bottom.

When you come into the page, the tab at the bottom shows all your borrowing power used for a credit line. As you enter draw amounts for cash or monthly payments, the amount of the credit line declines.  If you only want a monthly tenure payment, enter the amount shown under “Monthly Payment” . The credit line amount will immediately fall to zero or very close to it because of rounding.

An important feature of the HECM program is that if you decide you want only a tenure monthly payment, you are not locked in. You can change your mind and convert the remaining payments into a credit line. On the line for “Future Financial Projections”, click on “View.” The conversion option is the right-most column.

When you have finished, 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.

 

 

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