The reverse mortgage 'ATM'

Part 2: State of the 'reverse' market

As noted in the first article of this series, the financial crisis eliminated private reverse mortgages, leaving only the federal program of Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration. The HECM program is very powerful, however, and offers borrowers multiple options for drawing funds. These options are the subject of this article.

The Net Principal Limit: The different options can be visualized as different ways of removing money from a pot with a fixed amount in it. HECM borrowers can draw a maximum amount immediately and none thereafter; take a credit line on which they can draw at their convenience; take a fixed-payment annuity over a period of their choice; or some combination of the last two. The starting point for all the options, however, is the amount in the pot at the outset.

Assume a hypothetical owner, Bob Smith, 70, with a house worth $400,000 and no existing mortgage, selecting a monthly adjustable-rate HECM. Based on the shopping I did for Mr. Smith on Dec. 1, 2009, the "principal limit" (PL) on his house was $216,800. The PL is the value of Smith’s house now to an investor who must wait for Smith to die or move out permanently before he or she can take possession. The PL is affected by the borrower’s age, the interest rate and the value of the house.