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- Loan Specifications - The importance of
comparing proprietary to HECM loans is discussed at
www.aarp.org/revmort/contents/careful.html/.
On that
page and the four that follow it, you can read about
"Model Specifications for Comparing Reverse
Mortgages."
- Creditline Comparison
- Most borrowers select
creditlines. But it's not always easy to determine which
creditline provides the most cash. For example: a
75-year-old borrower lives in a home worth $260,00 in
a county where the HUD 203b limit is $132,000. In
March of 2001, this borrower could get a HECM
creditline of $69,476, a Financial Freedom creditline
of $76,898, or a Fannie Mae creditline of $95,202.
If this borrower withdraws and expends all available
funds at closing, the Fannie Mae creditline would
clearly provide the most total cash, and there would
be no funds remaining in any of the creditlines. But if
this borrower draws $6,000 per year, here is how much
cash would remain in each account at various future
times:
| |
HECM |
Financial Freedom |
Fannie Mae |
| Initial Creditline |
$69,476 |
$76,898 |
$95,202 |
| Creditline Growth |
7.07% variable until all
is drawn |
5% fixed
for 9 years |
none |
| Annual Draw |
$6,000 |
$6,000 |
$6,000 |
Creditline Remaining
Available after8 years |
$59,875 |
$57,090 |
$47,202 |
12 years |
$52,619 |
$33,090 |
$23,202 |
16 years |
$43,000 |
$9,090 |
0 |
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As the table demonstrates, a borrower withdrawing
$6,000 per year in this example would be highly likely
to get more total cash from the HECM creditline, which
was the smallest of the three at closing.
Because the amount of cash remaining available in it
grows larger every month until all of it is withdrawn, the
HECM creditline, which was about $25,000 smaller than
the Fannie Mae creditline at closing, could provide about
$12,000 more cash after 8 years, about $30,000 more
cash after 12 years, and $43,000 more after 16 years.
In fact, the HECM borrower would still have creditline
funds available past age 100 - some 10 years after the
Fannie Mae creditline would have been exhausted.
Software based on AARP's "Model Specifications for
Comparing Reverse Mortgages" can make precisely
this type of "what if" comparison.
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- Total Loan Comparison - Software based on the
model specifications also projects a side-by-side comparison
of the overall loan at five different future points in time,
which equal the following percentages of the borrower's
remaining life expectancy: 20%, 60%, 100%, 140%, and
180%. Here is an example at the life expectancy of the
borrower in the table above, assuming annual creditline
draws of $6,000 and 4% annual average home appreciation.
At this appreciation rate, the future home value would
project to be $416,268. Assuming a 7% sales commission,
the home's net value would be $387,129:
Future net
home value
= $387,129 |
HECM |
Financial Freedom |
Fannie
Mae |
Total Cash Advances |
$72,000 |
$72,000 |
$72,000 |
Cash Remaining |
$255,101 |
$237,632 |
$232,034 |
Net Cost |
$60,028 |
$77,497 |
$83,095 |
Total Annual Rate |
10.00% |
11.86% |
12.40% |
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At life expectancy, this borrower will have withdrawn
$72,000 from the creditline at $6,000 per year. But
assuming she with-draws all remaining creditline funds
from her HECM creditline at this point, she would retain
$255,101 after the sale of her home. So her net loan
costs would be $60,028. Note that the total of these
three figures equals the net home value. The same is
true for the other loans.
So these three measures show:
- how much of the home’s future net value is
paid to the borrower during the loan,
- how much would remain for the borrower
(or heirs) at the end of the loan, and
- how much would be paid in loan costs.
This comparison demonstrates that despite providing
the same amount in cash advances, the cost of these
loans would vary substantially. At life expectancy, the
Financial Freedom creditline would cost about $17,000
more, and the Fannie Mae creditline would cost about
$23,000 more - for the same loan advances.
Five years later, at 140% of life expectancy, the HECM
creditline would have provided about $7,000 more in
loan advances than the Fannie Mae creditline. But the
net cost of the HECM creditline would be about $50,000
less than the Fannie Mae creditline.
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- Model Specifications
- Software meeting the model
specifications compares loans over time on a side-by-side,
"apples-to-apples" basis. It estimates the cash you could
get, the cash remaining at the end of the loan, the net cost
to you, and the total annual cost rate. Here is a closer look
at each of these measures:
TOTAL CASH ADVANCES is the total of all the cash
advances you would receive up to the end of the loan,
including your specified creditline draws. But this figure
does not include any amount remaining in a creditline
at the end of the loan.
CASH REMAINING is the total amount of cash that
would be available to you or your heirs at the end of the
loan. It includes any amount remaining in your creditline
at that time, and any equity left over after the loan is repaid.
This figure assumes that 7% of your home’s future value
will be used to pay a sales commission to a realtor.
NET COST is the total dollar amount that you would owe
at the end of the loan, including the final creditline draw,
minus your "total cash advances" and any final creditline
draw. (This number could be negative if the total amount
of cash you receive is greater than the total amount you
would owe.)
TOTAL ANNUAL RATE is the total annual average cost
expressed as a single rate. It is similar to the Total Annual
Loan Cost (TALC) defined in Truth-in-Lending law except
that it is based on the five future dates explained above
and, if you choose a creditline, takes into account the
specific creditline draws you select and assumes you
withdraw all remaining funds at the end of the loan.
SUMMARY: When you add Total Cash Advances, Cash
Remaining, and Net Cost for any plan and year, the total
equals 93% of the home’s value at that time, assuming it
has appreciated at the rate stated on the printout, and the
cost of selling the home equals 7% of that value.
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Copyright © NCHEC. All rights reserved.
Revised: August 31, 2001.
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