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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credit line can be withdrawn immediately as a lump sum, or over time as you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
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