You are using an older browser version. Please use a supported version for the best MSN experience.

Will a HECM Reverse Mortgage Leave Nothing For My Heirs?

The Huffington Post The Huffington Post 23/03/2016 Jack M. Guttentag
RETIREMENT INCOME © kupicoo via Getty Images RETIREMENT INCOME

That seems to be a fear of many seniors, who are caught in a conflict between wanting to provide a bequest to their family when they die, and wanting to enhance their own lives in the meantime. The fact is, however, that the HECM program is designed to serve both objectives. While a HECM necessarily reduces the home equity that becomes available to the borrower's estate, in most cases it does not absorb all the equity. Furthermore, and this is the critical point, seniors have discretion with regard to the amount of home equity that is used to meet their own needs, and the amount that is retained for their heirs.
Unfortunately, in most cases they don't use that discretion because they have no idea how their selection of HECM draw options will affect the equity that will remain for their heirs. Recently, however, my Kosher HECM Reverse Mortgage Calculator was upgraded to generate that information. The calculator now estimates the equity that will accrue to the borrower's estate for any combination of draw options the senior selects.
This is illustrated by the attached table, which assumes a hypothetical senior of 65 who owns a debt free home worth $400,000. In Case 1, I assume she has enough income to meet her recurring needs, but is anxious about the possibility that she may face heavy medical expenses down the road. She selects a credit line which grows at the same interest rate as the HECM so long as it is not used. After 10 years, the line has grown to $376,000, at which point she owes only $10,000 - consisting of her HECM settlement costs plus 10 years of interest.
Parenthetically, this use of a HECM as an insurance policy against unknown contingencies has got to be the best bargain available in financial markets. If the senior never has to use the policy, all her home equity except the inconsequential amount she owes on the HECM will go to her heirs. And if she does need to draw on the credit line to pay her bills, no one will question the decision.
In Case 2, I assume that the senior has significant unmet needs right now, and draws the maximum amount of cash available to her at closing, which is $124,460. (A second installment becomes available to her after 12 months, but I assume she has no need for it and allows it to grow unused). This sizeable advance results in a significant loan balance, which reduces but does not eliminate the home equity that will become available to her heirs. If she dies after 30 years, her estate will owe $509,000 but it will realize $1.3 million on the sale of the home.
In Case 3, I assume that the senior must supplement her income, and elects to draw the maximum monthly tenure payment of $1068. In this case, her equity is higher than in Case 2 in the early years, but it becomes lower as the years go by.
In Case 4, she draws a payment of $3900 for 5 years only. Her equity is the lowest of all the cases, but it remains positive.
The calculator works just as well when the senior selects a combination of options. To illustrate that point, Case 5 assumes an upfront cash draw of $30,000, a monthly tenure payment of $500, and a credit line of $74,000.
The figures for home equity are, of course, estimates. They are based on the assumption that the property will appreciate at 4% a year, which has been the average over a very long period and is the figure used by HUD in setting draw amounts. Obviously it may not apply to any shorter period or to any particular house. And of course, equity varies with the senior's mortality, which is why we programmed the calculator to compute the results for every year until age 100.
Forecasting the future is always subject to error, but forecasts based on the best possible information will turn out better than those based on hunch and surmise.
Equity Retention With a HECM Adjustable Rate Reverse Mortgage on March 7, 2016
(Borrower of 65 With a Home Worth $400,000 Initially, and No Existing Mortgage)

                                        

Draw Options
Exercised by Borrower

Future Credit
Line

Future Loan
Balance

Future Home
Value

Future Equity in
Home

Case 1:
Retention of Maximum Credit Line, Borrower Draws No
Cash or Monthly Payments

After 10 Years

$376,000

$10,000

  
$592,000

$582,000

After 20 Years

 
672,000

 
18,000

876,000

 
859,000

After 30 Years

    
1,200,000

 
32,000

  1,297,000

1,265,000

Case 2: Borrower
Draws Maximum Upfront Cash of $124,460

After 10 Years

136,000

204,000

592,000

388,000

After 20 Years

215,000

323,000

876,000

554,000

After 30 Years

339,000

509,000

1,297,000 
  

788,000

Case 3: Borrower
Takes Maximum Monthly Tenure Payment of $1068

After 10 Years

0

177,000

592,000

415,000

After 20 Years

0

461,000

876,000

415,000

After 30 Years

0

932,000

1,297,000

365,000

Case 4: Borrower
Takes Maximum Monthly Payment For 5 Years of $3900

After 10 Years

0

357,000

592,000

250,000

After 20 Years

0

590,000

876,000

337,000

After 30 Years

0

973,000

1,297,000

446,000

Case 5: Borrower
Takes $30,000 in Cash, $500 Monthly Tenure Payment,
and $74,000 Credit Line

After 10 Years

117, 000

134,000

592,000

458,000

After 20 Years

185,000

288,000

876,000

588,000

After 30 Years

292,000

531,000

1.297,000

766,000


For more unbiased information on reverse mortgages or mortgages in general visit my website The Mortgage Professor

More from Huffington Post

The Huffington Post
The Huffington Post
image beaconimage beaconimage beacon