 |
Guiding borrowers to the right decisions Protecting borrowers from mortgage predators |
As a Federally insured program under FHA, the HECM reverse
mortgage program is not designed to help the wealthy. In
calculating maximum draw amounts, the highest property value
it will recognize is $625,500. If your house is worth $1
million, or $10 million, you can’t draw more than the
amounts available on a home worth $625,500. Further,
although higher value properties reduce the risk of loss to
FHA, the mortgage insurance premium is the same for a
property worth $1 million and one worth $625,500.
This does
not
mean, however, that owners of pricey homes can’t use the
HECM program to their advantage. They can and I explain how
in this article.
The key
question, which is the same for all senior homeowners, is
whether the withdrawable amount that is available on the
owner’s house can make a significant difference in her
lifestyle. If the answer is “yes”, the case for the HECM is
as strong when the house is worth $1 million as when it is
worth only $625,500. The reason is that the owner of a
pricey house, who has excess equity upon entering the
program, will retain it when leaving the program, whether by
selling the home, moving out of it permanently, or dying.
An owner with
excess equity whose intent is to leave the equity to her
estate, can do exactly that. What she cannot do is convert
all equity into spendable funds for her own use unless she
decides at a future time to downsize by selling her existing
house and paying off the HECM. She can then buy a less
pricey house with a new HECM, converting the excess equity
into investable funds.
Here are three
examples of 65-year olds looking ahead 12 years who own a
million dollar home but have different needs.
Sam is 65 with
a home worth $1 million that has an outstanding mortgage
balance of $300,000. His objective is to rid himself of the
monthly payment by paying off the balance with the HECM,
while retaining as much of his equity as possible. The HECM
he selects from among those posted by lenders on my web site
is an adjustable with an initial rate of 2.975% and
origination fee of $3500. This combination of rate and fee
will result in the lowest HECM debt after 12 years, which
was his target period.
Sam’s equity
after 12 years is the value of his home at that point less
his HECM debt. Assuming an annual appreciation rate of 4%,
which is the figure that HUD uses in calculating draw
amounts, Sam’s home will be worth about $1.6 million. His
HECM debt will be anywhere from $532,000 if the initial rate
of 2.975% remains unchanged for 12 years, to $884,000 if the
rate immediately jumps to the maximum of 7.975%. Sam’s
estimated equity, therefore, will be somewhere between
$717,000 and $1,072,000. This is the amount Sam would
realize if he sold the house and paid off the HECM at age
77, and it is also the amount that would go to his estate if
he died at that age.
Lets now
assume that Sam is alive and kicking at 77 but no longer
needs the house with the HECM. As is the case with many
seniors, he wants to downsize. So he sells the house and
pays off the HECM, realizing (on the most conservative
assumption) about $717,000. If his new house costs
$600,000, he can draw about $358,000 on a purchase HECM at
age 77, and will pay the balance of $242,000 out of his
sales proceeds. That would leave at least $475,000 for
investments.
Sue selects an
adjustable HECM at 4.725% with a $6,000 origination fee that
offers the largest tenure monthly payment – one that lasts
as long as she lives in the house – of $1844. Sue uses less
equity than Sam over 12 years because her draws are spread
out over the period rather than upfront. Her equity at the
end of the period is between $1 million and $1.2 million.
Sue has the same option as Sam to downsize by paying off the
HECM and taking out another one to purchase a less costly
home.
Sheldon
selects the same HECM as Sue because it generates a larger
credit line over 12 years than any of the other available
HECMs. The line at that time will range from $671,000 to
$1,113,000, depending on what happens to his HECM interest
rate. This is the amount Sheldon will be able to draw in
order to invest in income-earning assets. After this draw,
Sheldon would still have equity of from $451,000 to
$908,000. As with Sam and Sue, Sheldon could also downsize
if that was where he wanted to go.
In sum,
seniors with houses worth more than $625,500 retain their
excess equity when they take out a HECM reverse mortgage,
and if they decide to downsize at some point, they can
convert the equity into investable funds. No two seniors, of
course, are exactly alike, and each requires a plan that is
hand-tailored to their needs, their preferences and their
outlook. My HECM calculator was designed for that purpose.