Will a HECM Reverse Mortgage Leave Nothing for My Heirs?

Will a HECM Reverse Mortgage Leave Nothing for My Heirs?

March 16, 2016

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. The number of distribution options is almost limitless. We have chosen four examples that estimate the equity that will accrue to the borrower’s estate based on a 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, we 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 we 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, we 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 senior can select a combination of options. To illustrate that point, Case 5 assumes an upfront cash draw of $30,000, a monthly tenure (lifetime) 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.

Remember that Mom’s living expenses will generally come from a limited number of sources. Something will be declining; savings and investments, assets used by family to support her, or home equity. So when heirs contemplate the possible loss of home equity, they should know that the dollars for a dignified retirement must come from somewhere. Anything spent by Mom will ultimately reduce their inheritance. That’s life and it’s nothing new.

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.

Call Bob at 703-475-1555 or email to get your own free calculation. The examples here assume no current mortgage on the home but the program is available to those with loan balances. Find out what is possible.

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 / 766,00