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October 20, 2003
"I am 75 and plan to take out a Home
Equity Conversion Mortgage. My problem is that I keep vacillating between the
different options. One day I think I want the credit line and the next day I
think I want something else. Can you help?"
I can�t give you any specific advice
because I don�t know your life plans. I can give you a piece of general
advice, however, which is not to agonize about your choice because it is not
irrevocable. You can change the option at any time, provided you aren�t maxed
out. What that means will become clear shortly.
Under FHA�s Home Equity Conversion Mortgage
(HECM) program, you choose from 5
payment plans, which are designed to meet diverse needs. All of them
require that you maintain the property as your principal residence.
Line of Credit: You may make withdrawals at
times and in amounts selected by you, not to exceed a specified maximum
draw.
Monthly Payments:
Term: You receive payments for a period
selected by you.
Tenure: You receive payments for as long
as you remain in the house.
Combination:
Line of credit plus term.
Line of credit plus tenure.
Assuming your house is worth $100,000 and the
interest rate is 6%, your credit line would be about $58,400. It grows every
month at a rate equal to the interest rate plus the 0.5% mortgage insurance
premium. If you didn�t draw during the first year, for example, the line at
year-end would be $61,900.
You could also withdraw $58,400 immediately, but
if you did, you would be maxed out. You could draw no more funds under the
contract.
If you elect a monthly payment only, you could
draw about $1250 a month for 5 years, or $720 for 10 years, or $475 for as long
as you live in the house. You
could also select any combination of credit line and monthly payment, e.g., you
might take $10,000 under the credit line combined with $1050 a month
for 5 years, or $610 for 10 years, or $400 for as long as you live in the house.
Where the credit line provides maximum
flexibility, monthly payment options provide discipline and convenience. You
commit yourself, although not irrevocably, to using up your credit line over a
specified period.
If you elect to take $1250 a month for 5
years, for example, the entire initial line of $58,400 is set aside for this
purpose. So long as you are on this path, you can�t draw any more funds. If
you go the full 5 years, you are maxed out. The only way you can draw more is by
refinancing, which will be the topic of another column.
But you can change your mind before the
period is over. If you do, the portion of your line that is unused at that point
becomes available for a new plan, which could be a different monthly payment or
a credit line. After one year of drawing $1250, for example, $46,480 of your
line would remain unused and available.
If at the outset you had elected to receive $450
for as long as you live in the house, at the end of one year the unused portion
of your line would be $56,200. You used less than in the previous example, so
more is available.
Indeed, you can fully husband your credit line
by drawing an amount equal to its growth. This would be about $275 a month. If
you drew that amount, your line would remain at $58,400.
Most HECM borrowers take the credit line, and
they use a sizeable chunk of it right away. They pay off debts, fund overdue
maintenance, and treat themselves, perhaps to a long-deferred vacation or the
like. They may use the balance of the credit line to fund a monthly payment, but
more often they hold it as a reserve against unexpected costs that can�t
easily be covered by their existing budgets. This approach makes perfectly good
sense.
On the other hand, monthly payment plans are
extremely convenient, especially considering that if need be, they can be
converted to credit lines at any time. Perhaps most reverse mortgage borrowers
to date have preferred credit lines because they have had urgent financial
needs. As reverse mortgages gain increasing acceptability and more homeowners
take them to enrich their lives rather than to relieve financial distress, more
of them may opt for monthly payment plans.
Copyright Jack Guttentag 2003 | 
