Some reverse mortgage borrowers don’t make the right choice when it comes to the loan options presented to them, while others simply aren’t aware of the consequences of their choices in the long run, writes The Mortgage Professor (a.k.a. Jack Guttentag) in an Inman News article this week.
The second in a new series of reverse mortgage-focused articles, Guttentag hones in on borrowing power of seniors: how they can maximize the benefit of a reverse mortgage.
“The different HECM payment options can be viewed as different ways that seniors can use the borrowing power of their homes. Total borrowing power depends on the property value, the age of the youngest co-borrower, and the expected interest rate and upfront fees on the HECM. The senior can use her borrowing power to withdraw cash, purchase an annuity, reserve a credit line that grows larger as long as it is not used, or some combination of the three.
…The different options have different implications for the growth of mortgage debt. All the options result in the same debt when the borrower reaches age 100, but prior to that longer annuity periods result in smaller debt growth.
For example, after five years, the debt of the senior who took the largest possible tenure annuity is only one-third as large as the senior who withdrew the maximum amount of cash. This means that if the borrower dies early, her estate is substantially larger if she had taken the tenure annuity. Further, assuming she lives on, she can convert her lower debt in the early years into additional borrowing power by modifying her program, a point discussed below.
The article details different scenarios that are available and takes a look at the loan balance that accrues over time. Ultimately, the Mortgage Professor advises taking the minimum amount that is needed upfront and reserving the alternative options for the future, especially in the case of younger borrowers.
Written by Elizabeth Ecker