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Using Decision Variables for Reverse Mortgage

How to effectively shop for a HECM

Aug. 18, 2017

By JACK GUTTENTAG The Mortgage Professor (Tribune News Service)

How does one effectively shop for a home-equity conversion mortgage?

The secret is to ignore the interest rate and origination fee, focusing instead on exactly what you need, based on your retirement objective. I call these needs "decision variables," and the major ones are listed, along with the retirement objectives to which they apply, in the table published alongside this column.

For example, the senior whose major objective is to increase current and future income as much as possible will shop for the largest monthly tenure payment, which is paid as long as she resides in the house.

If the senior has a concern about the size of her estate, she will also look for the HECM that results in the smallest future debt. Since it is unlikely that the HECM that generates the largest tenure payment also results in the smallest future debt, the senior has to decide which variable has priority.

This example illustrates why the list of decision variables does not include the interest rate and origination fee. A higher interest rate results in a larger monthly tenure payment, and also a larger future debt. Whether or not a borrower finds a higher rate attractive or unattractive, therefore, depends on which of the two decision variables carries the greater weight.

Every one of the 10 retirement objectives shown in the table has two, and in some cases 3, decision variables. There is nothing unusual or problematic about that; juggling conflicting decision variables is what consumers do all the time.

When I bought my last car, there were at least eight decision variables I considered, and my wife complained that I gave greater weight to the quality of the sound system than to the comfort of the rear seats.

The credit line is a uniquely valuable feature of the HECM -- the federal government's reverse mortgage program -- and figures prominently in the table of retirement objectives and decision variables.
  • Some seniors want to use all their borrowing power to acquire a credit line, which they can use at any time for any purpose (objective 8). They would shop for the largest initial credit line, subject to possible concerns about future debt.

  • Seniors with an existing mortgage balance that must be paid off with a HECM may elect to use any excess borrowing power as a credit line (objective 4). They would also shop for the largest initial credit line.

  • Other seniors prefer to divide their borrowing power between drawing a fixed monthly payment and holding a credit line (objective 2). They would shop for either the largest initial credit line assuming a specified monthly payment, or the largest payment given a specified credit line.

  • Seniors whose major concern is that they will outlive their financial assets will view a credit line as a type of insurance policy, activated only if necessary (objective 7). They would shop not for the largest initial line but for the largest line after a considerable period, depending on their age. The HECM that provides the largest initial line may not be the one that provides the largest future line.

It has become increasingly evident to me that many, if not most, homeowners in or approaching retirement do not have a retirement plan.

About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

HECM Reverse Mortgage Decision Variables of Ten Retirement Objectives

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Copyright (c) 2017, The Mortgage Professor

Distributed by Tribune News Service.

This story was distributed by TNS - Tribune News Service
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