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Homemade Money: A Consumer's Guide to Reverse Mortgages

Session 7 - HECM Choice

Now that you've learned the basics about federally insured Home Equity Conversion Mortgages (HECM), it's time to look at some details. HECM loans offer you several ways to get cash from your home, and how you take that money will affect your bottom line. You have the option of taking your payments in a lump sum, a creditline, a monthly advance--or in some combination of all three.

Creditline growth

Perhaps the most attractive HECM feature is that its creditline grows larger over time. For example, if the creditline equals $50,000 and you withdraw $10,000, you would have $40,000 left. But if you next make a withdrawal one year later, you would then have more than $40,000 left—because the $40,000 grows larger by the same total rate being charged on your loan balance. If that rate were to equal 8 percent per year, your available creditline one year later would be $43,200 (8% x $40,000 = $3,200).

The bottom line: a growing HECM creditline can give you a lot more total cash than a creditline that does not grow, grows at a lower rate, or grows for a shorter time. The HECM creditline keeps growing larger every month for as long as you have any credit left—that is, until you withdraw all your remaining cash.

HECM creditline growth means you should not even think about taking a large lump sum of cash from a HECM and putting it into savings. If you did that, you would be charged interest on the full amount of the HECM lump sum. By comparison, if you leave the money in your creditline, you will not only avoid substantial interest charges, you will also end up with more available cash. Your creditline grows larger at a greater rate than a savings account is likely to carry.

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HECM creditlines grow over time.

Monthly advances

The federally insured HECM program also lets you combine a lump sum, a creditline or both with a monthly advance. The monthly loan advance does not increase or decrease in dollar amount over time, so it will buy less in the future as prices increase with inflation. You can choose how monthly HECM advances are paid to you

• for a specific number of years that you select (a "term" plan); or
• for as long as you live in your home (a "tenure" plan).

A term plan gives you larger monthly advances than a tenure plan does. The shorter the term, the greater the advances can be. But term advances run only for a specific period of time. You do not have to repay the loan when the term ends, but you no longer receive monthly loan advances past the end of the term you select.

HECM monthly advance, plus lump sums or creditlines

This table shows some of the combinations that could be selected by a 75-year-old female borrower living in a $150,000 home with a loan at 8 percent expected interest, a $30 monthly servicing fee, closing costs, and an origination fee equaling 2 percent of the home's value at closing.

The table above makes two things clear:

1. If you take more money as a lump sum or creditline, the advances are smaller.
2. If you select a shorter term of monthly advances, the amount of each advance is greater.

Also, you get the largest possible monthly advance if you do not take a lump sum or a creditline. But putting all of your loan funds into a monthly advance reduces your financial flexibility, especially if you have little in savings.

Keep in mind that monthly advances are fixed. So their purchasing power decreases with inflation. Adding a growing creditline to a monthly advance not only gives you a hedge against rising prices. It also provides readily available cash for unexpected expenses. If you are interested in a monthly advance, therefore, it's a good idea to consider a creditline as well.

Glossary

Tenure advances: Fixed monthly loan advances for as long as the borrower lives in the home.

Term advances: Fixed monthly loan advances for a specific period of time.

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