Reverse Mortgage Examples

A reverse mortgage when compared to other available options frequently offers the greatest likelihood of financial independence for the longest time. For example, for many homeowners the annual carrying cost of staying in their home (real estate taxes and homeowner insurance) is less than the annual cost of renting even a small apartment.  For both personal and for financial reasons, staying in your home with a reverse mortgage can be the “Smart Choice.”

Below four examples of how FHA HECM reverse mortgages can be used, followed by some actual examples of how HECM loans have been used. The first four examples are based on a youngest borrower age 75 with a $250,000 home on December 29, 2009.

Youngest Borrower Age 75
Home Value $250,000
Fixed Rate Loan Amount $147,273
Adjustable Rate Loan Amount $133,285

Example 1: $100,000 Existing Mortgage
Problem: Homeowner can no longer afford $800 monthly payment on $100,000 mortgage on $250,000 home. Solution: Use adjustable rate line of credit reverse mortgage to pay off mortgage and eliminate mortgage payment. 
Result: Improve cash flow $800 per month. Of the initial amount of $133,285, there remains a $33,285 credit line available for future use.

Example 2: $140,000 Existing Mortgage
Problem: Homeowner can no longer afford $1200 monthly payment on a $140,000 mortgage on $250,000 home.
Solution: Use fixed rate reverse mortgage lump sum to pay off mortgage and eliminate mortgage payment.
Result: Improve cash flow $1200 per month. Of the initial amount of $147,273, there remains a $7,273 for future use. 

Example 3: No Mortgage but Cash Short
Problem: Need additional cash to pay basic living expenses
Solution: Use adjustable rate line of credit reverse mortgage. Withdraw annual growth amount (currently over 3% of the $133,285 or about $4,000 per year) to pay or help pay real estate taxes and insurance.
Result: Improve cash flow over $300 per month ($4,000/12). Keep $133,285 credit line as rainy day fund for future use.
 
Example 4: $100,000 Mortgage; Use Reverse Mortgage to Purchase New Home
Problem: Homeowner can no longer afford $800 monthly payment on $100,000 mortgage on $250,000 home and current home has accessibility problems for senior homeowner
Solution: Sell home for $250,000. After paying off mortgage and after other miscellaneous costs, assume $130,000 cash remaining. Put $103,000 down on new home worth $250,000 Pay rest of purchase price with fixed rate reverse mortgage of $147,273 on new home.
Result: Homeowner now owns new home of equal value with no mortgage payments and has about $27,000 remaining from sale for future use. Cash flow improved $800 per month.

Following are examples of how HECM loans have been used.

Cash was running short to pay the monthly $500 mortgage payment on a $75,000 mortgage for a couple living in a $150,000 house. The homeowners pointed out that if they sold the house and moved they would likely walk away with a check for $50,000 and asked, "What would we do with that?" They figured that if they sold and moved to an apartment they would be out of cash in as little as 4 or 5 years. They qualified for enough in a reverse mortgage to both pay off the $75,000 mortgage (and eliminate their mortgage payment) and had about $30,000 left in a line of credit for future use. By staying in their home with a reverse mortgage the couple expected to be able to remain financially independent for 10 years or more as opposed to 4 or 5 years in an apartment. They chose to stay in their home with a reverse mortgage.

A couple in their late 80's was running out of cash.  "We didn't know what we were going to do." A friend suggested they look into getting a reverse mortgage. They qualified for a monthly check of nearly $1,100. Three years later they have the money for what they need to do and some extra for what they want to do, including home improvements. They recently demonstrated how proud they are of their new windows and said their reverse mortgage was the best thing that ever happened to them.

An 84 year old woman had social security income, modest savings, and a free and clear house worth $62,000. She wanted to stay in her home. She could handle her monthly expenses, but did not have cash for $3,000 of roof repairs or to visit her daughter in California. Her daughter suggested a reverse mortgage. A reverse mortgage offered her tax free income for life of over $300 per month or a lump sum of over $38,000. She chose to combine a lump sum of $3000 with a reduced monthly income for life of over $270.00. The additional income will permit her to visit her daughter in California.

A couple in their early 70’s with a $175,000 home qualified for a lump sum reverse mortgage of $106,000 or monthly income of $670 for life. They used $30,000 to buy a new car and some other items, and have improved their lifestyle with a monthly income of $469 from the reverse mortgage. There remained available a line of credit totaling $76,000 for future use. The “growth rate” that applies to the unused line of credit means that they will save significantly more that $76,000 available should they need more cash in the future.

A retired professional in his late 70’s with a free and clear home worth in excess of $475,000 qualified for a lump sum reverse mortgage of $205,000 or $1600 monthly income for life. He could have sold his home and moved to a smaller home but preferred to stay in the home where he and his family had lived for over 40 years. He used $50,000 for home improvements, and now has a monthly income for life in excess of $1200 from the reverse mortgage.

For more examples see "Estate and Financial Planning"

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