One of the great features of the home equity conversion mortgage (HECM) program is that eligible seniors have multiple options designed to meet a variety of different needs. They can a) draw cash upfront; b) select a credit line on which to draw in the future at their own initiative; c) receive a tenure annuity for as long as they remain in their home; and d) receive a term annuity for a period the senior selects.
These options allow seniors to meet a large variety of needs. Here is a partial list, indicating the option involved:
- They can relieve themselves of the monthly payment obligation on an existing mortgage or other debt by paying it off with a HECM, which has no required payment (a).
- They can minimize the cash drain involved in purchasing a house by taking a HECM in conjunction with the purchase (a).
- They can draw funds intermittently to meet unanticipated or special occasion cash needs (b).
- They can offset the loss of a pension when the spouse drawing the pension dies (b).
- They can supplement their income for as long as they live in their home (c).
- They can supplement their income for a limited period until they sell their home (d).
- They can replenish the gap in available funds when they outlive their financial assets (b and d).
The list above is partial because it does not include the use of a HECM for multiple purposes. Seniors can combine a cash withdrawal with a credit line, a tenure payment or a term payment. Similarly, they can combine a credit line with a tenure payment or a term payment. Option combinations substantially expand the list of needs that can be met with a HECM.
But sadly, most seniors are not taking advantage of this versatility in the program. Most simply draw the maximum amount of cash allowed at the outset, period. While this is justified in some cases, indications are that in too many cases the funds are not being deployed prudently. There are three interrelated reasons for this:
- Shortsightedness on the part of seniors. They tend to overvalue the present and undervalue the future, just like their juniors.
- Absence of good advice. Loan officers would lose money if they encouraged seniors to shift from cash withdrawals to credit lines, and counselors are barred from expressing a preference for one option over another.
- The poor quality of information available on alternative options. Some seniors don’t even know there are options other than all-cash withdrawals, and many of those that do know are deterred by an unjustified fear that the adjustable-rate HECMs required for all but the all-cash withdrawal would be risky for them.
The best available information is poor because lenders don’t view the provision of information as a help in generating business. Most lenders don’t have HECM calculators on their websites, and almost all of those that do require users to identify themselves so that they can be contacted afterwards by salespersons.
Users do not have to identify themselves to use a calculator from Ibis Software that is available from HUD’s Web page on HECMs, and from the website of the National Reverse Mortgage Lenders Association (NRMLA), the trade association.
This calculator, however, does not cover all the relevant combinations of HECM features that might interest a senior; it does not allow users to see how the different options affect their future finances, and it provides very little explanatory information.
My colleagues and I decided to remedy this and have designed a new HECM Calculator that is now on my website. The calculator is actually 10 interconnected calculators designed so that one of the 10 provides the precise HECM option or combination of options that the senior needs.
The calculators show not only the transaction features, but also project the status of the transaction (including outstanding debt and unused credit line) every year until the senior reaches age 100. Each calculator includes explanatory text and examples of how it is used. The table shows how our calculator compares to the Ibis calculator:
|
HECM Feature |
MP Calculator |
Ibis Calculator |
|
Interest Rate, Fees and Other Closing Costs |
Yes |
Yes |
|
Maximum Cash Withdrawal |
Yes |
Yes |
|
Maximum Credit Line |
Yes |
Yes |
|
Maximum Monthly Tenure Payment |
Yes |
Yes |
|
Maximum Monthly Term Payment |
Yes |
No |
|
Maximum Credit Line With Specified Cash Withdrawal |
Yes |
No |
|
Maximum Credit Line With Specified Tenure Payment |
Yes |
No |
|
Maximum Credit Line With Specified Term Payment |
Yes |
No |
|
Maximum Tenure Payment With Specified Cash Withdrawal |
Yes |
No |
|
Maximum Tenure Payment With Specified Credit Line |
Yes |
Yes |
|
Maximum Term Payment With Specified Cash Withdrawal |
Yes |
No |
|
Future Loan Balances |
Yes |
No |
|
Future Home Equity |
Yes |
No |
|
Future Credit Line |
Yes |
No |
|
Examples of Each Possible HECM Option Use |
Yes |
No |
|
Online Help |
Yes |
No |
