This article describes the three major decisions that must be made in taking out a reverse mortgage. The purpose is to alert potential borrowers to the information they will need to make the best decisions possible, and where to get it. A second purpose is to help those who are on the fence about whether or not a reverse mortgage is in their interest, to make up their minds.
I will illustrate with the example of Mary, who is 65 and has a house worth $300,000 and no debt, but also has significant financial needs. To see whether a home equity conversion mortgage, the Federal Housing Administration’s reverse mortgage program, would meet those needs, Mary considers the three decision points based on market conditions on April 15, 2016.
–Take a fixed-rate or an adjustable rate? The fixed rate HECM is primarily for seniors who plan to use all or most of their borrowing power right away. Their intent is to pay off an existing mortgage, buy a house, purchase a single-premium annuity, or transact for some other purpose that requires a large immediate payment. Mary could draw up to $95,700 in cash for any such purposes. The fixed-rate HECM does not allow the borrower to reserve any borrowing power for future use. The rate on April 15 was 4.5 percent with zero origination fee.
The adjustable rate HECM allows seniors to draw funds at closing, and also to draw funds after the closing. Mary could draw $93,200 cash at closing and another $65,880 12 months later. Alternatively, she could draw $869 a month for as long as she lives in the house, or $1,727 a month for 10 years. Or she could do none of those and instead opt for a credit line which would begin at $159,080 and grow month by month so long as it is not used. The line can be accessed at any time, but the longer it is held unused the larger it becomes. In addition, Mary can combine these draw options, as noted below.