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Which Reverse Mortgage Plan Do I Choose?

Which Reverse Mortgage Plan Do I Choose?

April 8, 2003

�I am 79.  The counselor I saw in connection with my reverse mortgage told me that Fannie Mae�s Home Keeper product would provide me with more money than FHA�s Home Equity Conversion Mortgage, but that Home Keeper would cost me more.  The decision was mine, he said.  The problem is, I don�t know how to make the decision.  Can you help?�

Reverse mortgages are loans to elderly homeowners that need not be repaid until they die, sell their house, or move out permanently. The amount of money seniors can draw under a reverse mortgage program depends mainly on their age, the interest rate charged by the program, and the value of their home up to the maximum allowed by the program.  The draw is larger the older they are, the lower the rate, and the higher the value or value limit.

FHA�s Home Equity Conversion Mortgage (HECM) carries the lowest interest rate but also has the lowest maximum values.  These vary by county, and ranged from $154,896 to $280,749 in 2003.  (The FHA county limits can be found at https://entp.hud.gov/idapp/html/hicostlook.cfm.)  Fannie Mae�s Home Keeper has a higher interest rate but its maximum value limit was a uniform $322,700.

You have a house worth $300,000, well above the FHA maximum of $184,666 which is tied to the median home value in your county.  The maximum HECM credit line available to you is $120,252 and it is based on $184,666 rather than $300,000.  (The credit line can be withdrawn immediately as a lump sum, or over time as you prefer).

Your credit line under Fannie Mae�s Home Keeper program is higher, $132,753, because it is based on $300,000, the actual value of your home.  The higher value more than offsets the higher interest rate under this program.

Instead of taking a credit line, you could elect to receive a monthly payment for as long as you live in the house.  You could draw $883.16 under HECM and $1162.06 under Home Keeper. 

The other side of the coin is that because of the larger draw and the higher interest rate, you will accumulate more debt under Home Keeper. When you reach 95, assuming you take the monthly payments, you will owe $363,860 under Home Keeper but only $252,868 under HECM.

If you have no heirs that you are concerned about and want the largest possible monthly payment starting immediately, Home Keeper would be the right choice.  You could receive the $1162.06 under Home Keeper for as long as you live in your house.  The payments stop if you sell the house, or have to be in a nursing home for 12 consecutive months.

An alternative is to withdraw $132,753 as a lump sum and use it to purchase an immediate annuity from a life insurance company.  The advantage of purchasing an annuity is that it probably would be larger than $1162.06, and it would continue for life.  The disadvantage is that the annuity is only as good as the life insurance company from which you buy it, so limit yourself to a highly rated company.  You can find immediate annuity quotes on www.immediateannuities.com, which also shows the quality ratings of each company.

On the other hand, you might want to preserve as much equity as possible, either to leave in your estate or because you might sell the house at some point.  In such case, assuming you can make do with the smaller payment, HECM is the better choice because of the smaller buildup of debt.  You should consider the same alternative of withdrawing a lump sum and purchasing an immediate annuity.

If your immediate need for cash is small but you anticipate that it will grow, HECM may be the better choice regardless of your attitude toward preserving equity.  The credit line grows under the HECM program but not under Home Keeper.  If you use only 10% of the HECM line at the outset, the unused portion will be as large as the Home Keeper line in about 5 years.

If you have no immediate need for funds, defer a selection until you do have a need.  The passage of time increases the amounts you can draw under both programs, since you become older and the loan limits are raised every year.  But don�t use this as an excuse to procrastinate, do your homework and be ready. 

Under no circumstances should you draw money on any reverse mortgage for investment.  There are no safe investments available that pay a return higher than the cost of the reverse mortgage to you.  Draw to consume, not to invest.

Copyright Jack Guttentag 2003


Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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