Aging Options

White Paper on the Reverse Mortgage or Home Equity Conversion Mortgage (HECM)

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By Richard L. Harter CPM,CSM, CRES

Retirement and Financial Analyst

With 70,000 baby boomers per month entering their 60’s, the lenders for Reverse Mortgages (Home Equity Conversion Mortgage (HECM)) are cranking up their advertising.  The Reverse Mortgage and Bi-weekly Mortgages are advertised with certain benefits that sound very attractive.  The primary purpose of these two loan types is to generate unnecessary fees and commissions for the lender.  What they do not tell you is that you can accomplish the same thing using existing banking instruments without doing a refinance, at essentially zero cost and fees. 

This discussion will focus on the HECM and we will leave the Bi-Weekly Mortgage to another discussion.  This paper will discuss the benefits of the HECM and the alternatives that are available to accomplish the same thing with more benefits with a lot less in expenses.

 The Come On or Hook

The HECM, or Reverse Mortgage, as it is talked about in advertisements, appeals to its audience of 62 and over with some strong come on or enticements.  It sounds so good, but is it the pathway to access the equity in your home that you should follow?  It could be.

 Some of the language you will hear or see in advertisements are as follows:

     If you are a home owner 62 and older a Reverse Mortgage can give you the retirement you deserve.

  •          The Reverse Mortgage is a government insured loan that turns your home equity into Tax Free cash.  (The amount borrowed is a loan and there is no taxation when you take out any loan.  It is not unique to a Reverse Mortgage.
    • o   Tax Free cash sounds like a special benefit attached to a Reverse Mortgage.  It appears to be something special when it is not.  All loans are tax free.
  • ·         You never have to make another mortgage payment as long as you live there.
  • ·         First thing – pay off credit cards and your current mortgage.
  • ·         Feel secure with a brighter financial future.
  • ·         Get the mortgage off of your back for better cash flow – NO MORE PAYMENTS!
  • ·         Life without mortgage payments, that alone is worth calling the lender.
  • ·         The money does not affect your Medicare, Medicaid or Social Security.  (Yes it can)
  • ·         You cannot lose your house because it is a Government Insured Loan.
  • ·         No default or eviction.  (In certain circumstances that could be very important.)
  • ·         You still own your home.
  • ·         Use the money to cover health care, remodeling or just use the money for true financial security.
  • ·         Retirement the way you want it.


All of the above is true.  There is no misrepresentation.  It is a good product, but a good or right product for the few and perhaps not for everyone.  There are alternative methodologies that I will introduce here that will accomplish or produce the same or better outcome at a lower cost and expense. 


First we will look at the HECM or Reverse Mortgage.  Then we will look at a “New Way of Thinking” where your “Money Works Smarter – Not Harder.”



Why the HECM is desirable or meets a need

The are legitimate reasons why the Reverse Mortgage can help meet desires and needs.

          The desire or need to eliminate monthly payments on perhaps more than just the mortgage.

  • ·         The desire or need for available cash or line to cover the short fall in retirement income.
  • ·         The desire or need to get access to the equity in your house without selling it. 
  • ·         The desire or need to continue to live in your home during your retirement years.
  • ·         The desire or need to be able to cover unexpected medical cost or the need to remodel the house to be able to continue your occupancy in the house when medical issues limit your capability to move through the house and use its facilities.


Loan Origination Fees

The one feature of the HECM that is excessive or prohibitive is the loan origination fees and how those fees are calculated.  To relax your attitude about this expense, the expense or cost is set aside as being of no consequences with language like the following:

 Many people are concerned about the costs associated with a Reverse Mortgage. However, if you want or need equity from your home, are not willing to relocate to a smaller home, don’t want to face regular loan payments and you are comfortable reducing the size of your estate left to your heirs, then the upfront costs of a Reverse Mortgage should not be a significant issue.” 

 This is called softening the shock in advance before you know the answer.  Due to the structure of the initial fees the phrase “should not be a significant issue” does not fly.  That significant issue on a $250,000 appraised valued home is $12,000.  That initial $12,000, plus other fees has a significant impact on the available benefits of the program.

 First, the HECM is designed for families that have equity in their home.  No equity, no loan.  

Second, the youngest person on the deed has to be 62 years or older.

 Positive Features of a HECM

There are positive features to the HECM that gives the lender incentive to promote this loan.  In essence, the lender has no real risk in the deal.  It is government guaranteed.  It cannot fail for the lender regardless of the market or client circumstances.


  • For the lender the HECM is guaranteed so that the amount owed can never exceed 95% of the LTV of the house.  If HECM reaches that level, then HUD and FHA come in and take over the loan.  Nice, no risk to the lender or the client.  This feature can be very important to some.


The Benefit of No Monthly Payments:  The HECM has no monthly payments.  All fees and expenses are added to the principal balance of the loan and are paid back to the lender with interest upon the sale of the house.


  • This feature can be an important feature when cash flow needs to be increased.  We increase cash flow by increasing income or decreasing expenses.  No monthly payments, decreases expenses.  The HECM works great for reducing the amount of money paid out.
  • While not having to make monthly payments can increase your cash flow you need to recognize that it does not necessarily reduce expenses, it is just delaying the payment of those expenses to some future date when the house is sold.


The available line-of-credit will increase over time based upon the annual interest rate, plus 1.25% to compensate for the 1.25% monthly MIP fee.  The increase occurs regardless of the valuation of your home.  It will not matter if the valuation is going up or down, the increase will still be applied.


As an example:  if we have a 5.5% loan, plus the 1.25%, you have 6.75% divided by 12 = 0.563%, which is then applied against the available line-of-credit, not the original line, but the available line. 


  • If you had an original line of $100,000 and you have already borrowed $20,000, the increase percentage would be applied against the remaining available line of $80,000 and not to the original $100,000 line. 
    • In this case your available line-of-credit for the next period would increase to $80,450 or an increase of $450 for the month. 
    • If you borrow another $10,000 the following month, the increase would be based upon $80,450 minus the $10,000 borrowed, or $70,450 resulting in an increase in the available line-of-credit of $396.28 for a total remaining line-of-credit of $70,846.28.
  • To make it simple and without calculating the interest due, which is also added to the principal balance, you just increased your borrowing power in two (2) months by $846.28.  Over time it can be significant.
    • Some suggest that with the available money growing (line-of-credit not borrowed), may outpace available money in a conservative investment.
  • Reminder, in the end, if your borrowing power goes up, at some point you could potentially have an LTV greater than the value of the home.  This would be particularly true if the value of your home does not appreciate. 
    • It may result that at the time of the sale of your home there would be no cash equity as a result of the sale. 
    • Any risk the lender may take is guaranteed by HUD and FHA.  To reduce that risk to HUD and the lender, the lender reduces the LTV allowed at the outset for younger qualifying borrowers.
    • If the loan develops an LTV of 95% or greater of the original appraised value, HUD will take over the loan.  That is the purpose of the MIP, to cover the excess LTV.
  • No monthly payments as long as you live in the house.  However, you cannot vacate the house for more than twelve (12) months. 
    • If you vacate for more than twelve (12) months the loan will be considered the same as though you have sold the house and the loan amount will be due.  You can pay off the loan from other resources, or sell the house to satisfy the lien.


Negative Features of the HECM

While there can be positive benefits as listed above, there is a cost and restriction to those benefits.


  • As a rule the underwriting for the approval of the loan is going to require that you have at least $500 excess cash flow, including monthly withdrawal, to qualify for the loan.
  • The LTV of the loan is based upon the youngest age that lives in the house, meaning both spouses have to be 62 years of age or older to qualify.
    • Available LTV is lower based upon age and interest rate of the loan.  It can be as low as 31% LTV of the appraised value which has certain limits on the benefit realized compared to the actual cost to open the loan. (See example Table 3 Below)
  • For HUD and FHA guaranteed loans the loan origination fee is based upon two sets of criteria with a potential maximum/minimum.
    • The initial fee is based upon 2% of the first $200,000.  So if the home is valued at $250,000, then this portion of the loan origination fee would be $4,000.
    • The secondary fee is based upon 1% of the additional value of the home, up to $625,500 with a maximum fee of $6,000.  If the home is valued at $250,000, then this additional fee would be $500 for a total HUD approved loan origination fee of $4,500.
    • Depending upon the lender the third party fees could be 1% or more, or an additional $2,500.
    • Total fee could then be $7,000 for this portion of the loan origination fee.
  • Mortgage Insurance Premium (MIP)
    • The initial MIP would be 2% of the appraised value of the house, or an additional up front fee of another $5,000.
  • Initial Expense / Closing / MIP
    • The initial expense in this case is $12,000 for establishing the loan.  The $12,000 is typically rolled into the loan and you start with a $12,000 balance owing.
  • Minimum / Maximum Origination Fees
    • If your home is valued at less than $125,000, then minimum loan origination fee would be $2,500.
    • If your home is valued at more than $625,500, then maximum loan origination fee, excluding general fees like appraisal, etc. is to be $6,000.
  • The LTV or available funds would be applied against a maximum of $625,500 for homes with a greater value.
  • You will also pay or be charged a $35 a month management fee.  Your actual management fee during the life of the loan will be greater than $35 per month.  The real cost of the management fee is hidden.   Here is why:
    • Each month there will be interest added to the prior month’s management fee charged to your account.


1st Month – 5% Interest $35.14 actual cost
5 year hold $39.92 per month average management fee
10 year hold $45.58 per month average management fee
15 year hold $52.31 per month average management fee
20 year hold $61.58 per month average management fee

Table 1:  Monthly Manage Fee – Real Cost


  • During the life of the loan you will pay 1.25% MIP per month on the existing balance of the loan. 
    • The MIP cost, just like the management fee, is even higher than you know.  It is hidden from view. 
    • The 1.25% of the current balance is added to the loan, then interest starts to compound on the MIP fee each month. 
  • With today’s available interest rate a rule of thumb for the available LTV is going to be the current age of the youngest residence minus 7.  As an example, if the youngest is 65 the available LTV would be set at 58%.  If your house has a current mortgage with a balance of 40% LTV, that would leave only 13.2% available after you have covered your insurance and closing fees.  (See the table that follows.)


Home Equity Conversion Mortgage (HECM)

Current Age




Home Appraised Value  $      250,000  
Level 1 Origination Fee  $      200,000  $        4,000


Level 2 Origination Fee  $        50,000  $           500


3rd Party Closing Fees    $        2,500


  Total Origination Fees    $        7,000
Mortgage Insurance Premium  $      250,000  $        5,000


  Total Closing Fees    $      12,000
Existing Loan Balance / LTV    $    100,000


New Loan Balance / LTV    $    112,000


Available LTV  $    145,000


Available Line-of-Credit  $      33,000


Table 2:  Available LTV of 13.20% after paying off mortgage and closing fees


  • If the payout is a fixed number of years, the income from borrowing can then be considered as cash income and may have an impact on Medicaid benefits. 
    • A fixed distribution of funds for a period certain is much like the money distributed from an Annuity when it is annuitized for a period certain and will be counted as income against the allowable level for Medicaid.



Table 3:  The above chart calculates LTV or the available loan amount in relationship to home value


HECM Exit Strategies

The HECM has a unique feature.  At the time you officially leave the home, the lender will be paid back from the proceeds of the sale of the house. 


You are officially considered out of the home upon the death of the last surviving spouse or when the home is not lived in for a period of twelve (12) consecutive months.


  • When the house sells, the proceeds from the house will be used to satisfy the loan, which includes the amount borrowed, the cost of MIP, closing fees, loan origination fees, the amount actually borrowed and the interest due on the loan. 
    • Even if the value of the house is less than the loan balance, the proceeds from the sale of the house will satisfy the balance on the loan and the MIP insurance picks (HUD and FHA guarantee) up the balance of the loan.  The lender, owner or heirs will not be liable for any debt in excess of the sales price.




Fortunately, for the majority of families with good fiscal responsibility, there is another methodology that can be used to accomplish the same thing at zero (0) costs.  It answers all of the same “desire and needs” as discussed above.  You may know this product, but do not fully understand its potential or how to use it.  It is the Home Equity Line of Credit (HELOC).  We will spend some time outlining the features and benefits and then compare the HELOC to the HECM or Reverse Mortgage.


How to Qualify for a HELOC

For the most part the underwriting for the HELOC would be the same as the underwriting for an HECM, except for certain advantages.


  • You must have income resources such as Social Security or pension money and equity in your home. 
  • You can qualify for a HELOC at any age over 18 years and you do not have to wait until age 62 to activate the features that are available.
  • No fees to start a HELOC.  Does Zero expense to get access to your equity work for you?
  • Interest is charged based upon the average daily balance during the month.
  • There is typically an annual continuation fee of just $50.
  • HELOC’s are available up to 85% of the value of the home or Loan to Value ratio (LTV).  In some cases it is available up to 95% LTV and does not have the lower limitations of the HECM.  You can then put more of your equity to work.
  • Interest rates for the HELOC or the HECM are essentially equivalent based upon the underwriting criteria of the lender.  At this time the interest rate will be approximately 3.5% to 4%.
  • HELOC’s function as a line of credit.  You can withdraw and/or make payments to the loan as often as you like without any fees or penalties.  This same feature is available in a HECM.
  • The line-of-credit has the potential to increase over time as the value of the home increases.
    • The HELOC allows increases based upon the appreciated value of the house. 
    • Over time the available funds in a HELOC will outlast the HECM every time, even if the housing market is depreciating 1% per year. 


Other Comparative Features

If you compare the HELOC to the HECM, you will find the HELOC outperforms the HECM every time.


  • The fees during the withdrawal benefit period will be substantially lower using a HELOC.  As an example:  If you are borrowing $500 per month from either loan type, and the withdrawal is increasing 2% each year to keep up with inflation, at the point that the HECM runs out of borrowing power, you will have paid an additional $59,000 more in fees and interest than you would if you were using the HELOC instead. 
  • That means the HELOC will have almost 8 years more of additional borrowing power before it runs out.



Feature HECM HELOC Variance To HELOC
Appraised Value $250,000 $250,000 $0.00
Loan-to-Value (LTV) – age 65 58% = $145,000 85% = $212,500 $67,500 more from HELOC
Loan Origination Fees $4,500 $0.00 $4,500 less
Other Loan Fees – Appraisal, etc. $2,500 $0.00 $2,500 less
Mortgage Insurance Fees (MIP) $5,000 $0.00 $5,000 less
Interest Rate – Essentially the Same 3.8% 3.8% 0.0%
Monthly MIP on Existing Balance 1.25% 0.0% 1.25% more
Monthly Management Fees $35 $0.00 $35 less
Monthly Borrowing – 2% Inflation Annual $500 $500 $0.00
Years Available 17.17 years 25.08 years 7.91 more for HELOC
Cost to Borrow at 17.17 years $106,653 $47,614 $59,039 less from HECM

Table 4: Comparison of HECM to HELOC Cost of Loan


There is a big difference between the two loan instruments that are designed to do the same thing, $59,039 more for the HECM.  In the end the HELOC has $71,529 more available in borrowing power before it hits the 85% LTV.  The HECM does have some features that can be important that are not available on the HELOC so it is important to understand the difference.


The following Table 5 is a comparative analysis between the HECM and HELOC of the remaining LTV available after paying off the 40% LTV ($100,000) loan on the house.  The HECM has a remaining 13.20% LTV and the HELOC has a remaining 45.00% LTV.  In additional to the $12,000 in closing fees, the original LTV for the HECM had a limit of 58% LTV and the HELOC had an 85% LTV.  Those two factors make a big difference in the results.


Home Equity Conversion Mortgage (HECM)


Current Age






Home Appraised Value  $      250,000        
Level 1 Origination Fee  $      200,000  $        4,000


 $              –  


Level 2 Origination Fee  $        50,000  $           500


 $              –  


3rd Party Closing Fees    $        2,500


 $              –  


  Total Origination Fees    $        7,000    $              –    
Mortgage Insurance Premium  $      250,000  $        5,000


 $              –  


  Total Closing Fees    $      12,000    $              –    
Existing Loan Balance / LTV    $    100,000


 $    100,000


New Loan Balance / LTV    $    112,000


 $    100,000


Available LTV    $    145,000


 $    212,500


Available Line-of-Credit    $      33,000


 $    112,500


Table 5: HECM and HELOC Comparison of Remaining LTV after paying of a 40% LTV


To arrive at equivalency the HECM borrower would have to be 97 years old or older to have the same results of available dollars (LTV dollars) after the 40% LTV has been paid off with the new loan.


No More Monthly Payments:

How can there be no more monthly payments with a HELOC when it is clear there is a required minimum monthly payment due. 


HELOC Monthly Payments:  The HELOC does have minimum monthly payments that are due based upon the balance in the loan and the interest rate of the loan.  The need for monthly payments is covered by using the following technique that essentially results in the equivalency of no monthly payments.


  • Every time you get a Social Security check, pension check or money of any kind from any resource, pay 100% of those dollars as a payment to the HELOC. 
  • When you need to make a payment or pay bills, borrow the money back from the HELOC to pay your bills.
  • As far as the bank is concerned, you have been making your payments, even though the average daily balance of your loan may be going up.
    • If during the month you make payments of $2,500 to the line-of-credit, but you pull out $3,000 or $500 more for living expenses, your $2,500 paid to the balance of the line-of-credit constitutes the payment each month. 
    • So instead of your check sitting in your checking account, put it to work reducing the interest due, then borrow out what you need for living expenses. 
    • The line-of-credit will grow by $500 per month, plus interest.
  • The other advantage, this methodology will reduce the average daily balance resulting in less interest charged to the account, leaving a greater portion available for the long term.


Negative Features of the HELOC

There are always negative features when a product is used the wrong way or for the wrong reasons.


  • A HELOC can be abused as can the HECM without proper financial systems to maximize the benefits of the plan.
  • If you owe more than the value of the house at the time of sale, you will be liable for the short fall.
  • If the market is depressed and the value of your home is devalued, as it has been in recent history, then the HELOC or line can be reduced or frozen.
    • Because of the initial higher LTV, the reduce LTV in a depressed market will not have an adverse effect as it might when making comparisons to the HECM.  The HECM already has a limited LTV and a reduce HELOC could potentially still be better than a HECM. 
    • This is not an issue for the HECM.  This is where the HECM has more value than a HELOC regardless of the additional cost and limited features when the margin of error can be to close to call.  Then an HECM has a better benefit to the borrower.




To help you understand the options available to you and to help you make a good decision, three (3) additional comparative analyses have been completed.


Let’s take a look at some comparative examples with the following assumption sets.


  • $250,000 home value
  • Zero (0) appreciation on the home value
  • Age 65
  • HECM LTV 58% available
  • HELOC LTV 85%
  • All fees included as discussed above for the HECM
  • Interest rate 4%
  • 2% per year cost of living increase
  • $500 withdrawn each month
  • Closing costs of $12,000 applied to the HECM principal balance
  • No Cash Out – the home is 100% debt free



Table 6:  Comparative Analysis


Reading the Results: Reading Table 6:


  • Chart A – Assumptions – The assumptions are set at the top of Table 2
  • Chart B – does a comparison of the HECM and the HELOC based upon the time period it takes the HECOM to mature.
  • Chart B – does a comparison of the HECM and the HELOC with separate maturity dates based upon the available line-of-credit.


Chart B is the easier of the two to look at and to quickly comprehend.


  • Initially you can borrow $67,500 more from the HELOC because of the allowed 85% LTV for the HELOC versus the 58% LTV allowed for the HECM.
  • The HECM starts with a $12,000 balance and the HELOC a zero balance.
  • They have the same amount withdrawn based upon $500 monthly and an annual cost of living increase of 2%.
  • MIP is $21,624 more for the HECM.
  • Interest is $19,052 for the HECM during its 17.17 years because it starts with a larger balance and has fees in addition to the interest rate.
  • Management Fees or $6,360 more.
  • The result is you will have paid $59,036 more in using the HECM compared to the HELOC for the same time period.
  • If the home was sold at that point you would have $59,036 more in equity using the HELOC than the HECM and finish with a 91.25% LTV for the HECM versus 67.64% for the HELOC.


Chart C is a little more difficult to understand because you will have access to your money 2.83 years longer.


  • Because of the extended time period, the total loan amount and interest charged is going to be more equivalent to the HELOC compared to the HECM.  Interest during the longer period will result in $1,483 more in interest for the HELOC than the HECM.
  • The total loan at the end of the period where the loan has been maximized shows a variance of ($14,089) fewer dollars due for the HELOC than the HECM
  •  If the home was sold at that point, you would have $14,089 more in equity by using the HELOC which results in a LTV of 91.25% for the HECM and $85.61% for the HELOC.  (Please note that the house value is the same at the beginning and the end of the loan period.) 
  • The HELOC has the ability to withdraw funds at least 2.83 years longer before the line is maxed out.  In this case 20 years for the HELOC compared to 17.17 years for the HECM.


Note should be taken that in this illustration the house has not appreciated allowing the available dollars to be borrowed to grow with the HECM, but not with the HELOC.



The following Table 7 uses the same assumption set, except the home appreciates at least 1.5% per year.



Table 7: New Assumption 1.5% House Appreciation


Reading the Results:  Reading Table 7

Even though the house has now appreciated at least 1.5% per year you will notice that the HECM performance in Chart B will have substantially stayed the same, except the LTV will have been reduced for both loan performance types.


Chart C, on the other hand will have a substantial change in results for the HELOC because it will last 7.91 years longer and provide $71,529 more in cash flow before the line is exhausted.


  • The actual loan balance at the end of the 25.08 years illustrated will be almost double the loan balance of Chart A if the HELOC had been stopped at the 17.17 years based on the performance of the HECM.
  • With a greater loan balance and extended years of 7.91 years, the interest charged will be greater as well by some $51,849 for the HELOC.



For Table 8 we are going to take a comparative look at having to pay off an existing lien on the property at the time of closing.  In this case we are going to add an additional withdrawal or cash out of $80,000 and look at the results.



Table 8: $80,000 Cash Out at Refinancing to Pay off Existing Loan

Reading the Results: Reading Table 8

With the addition of $80,000 cash out to pay of an existing mortgage you are going to have a shorter time period to enjoy the cash flow benefit of the HECM.  It will reduce the time back to 5.17 years.


Chart B – Comparison


  • These loans start out a two different levels – $92,000 for the HECM and $80,000 for the HELOC.
  • You have the same withdrawal of $32,328 in the remaining 5.17 years.
  • The HELOC will cost $3,546 less in interest.
  • The loan amount will cost you $25,413 more at time of maturity using the HECM.


Chart C, on the other hand will have a substantial change in results for the HELOC because it will last 9 years longer and provide $64,835 more in cash flow before the line is exhausted.


  • The actual loan balance at the end of the 14.17 years illustrated will essentially be doubled compared to the time period of the HECM’s 5.17 years illustrated in Chart B.
  • With a greater loan balance and extended years of 9 years, the interest charged will be greater as well by some $62,771 for the HELOC.
  • The relationship of the net equity is going to be less for the HELOC at maturity by essentially the same amount as the increased withdrawal of $64,835 compared to the net equity reduction of $67,219 of the HELOC at the point of maturity compared to the HECM.


Running numbers is very interesting.  It can help guide us in our decisions.  The decisions are going to be made based upon you particular set of circumstances.


  • The youngest family member’s age.
  • The interest rate for the loan.
  • The amount withdrawn as cash out to pay off the existing loan.
  • The valuation of the house.
  • The anticipated or projected appreciated value of the house.
  • The number of years remaining for practical use of the house.


While Table 6, 7 and 8 seem to illustrate that the HELOC is a better vehicle than the HECM to accomplish the same goal that may not always be true.  You have to run the numbers to find out the correct answer.  Different circumstances could make the HECM more attractive and useful than the HELOC.


Once all of these factors have been reviewed an analyzed, you will have a substantive set of numbers to guide you in your decision.


All illustrations used in this white paper are based upon assumed set of financial assumptions.  The numbers illustrated here are simply a study in the function of time and money and are direct calculations based upon an assumed set of assumptions as illustrated.  This is not a depiction of actual results.  Your actual experience and results can and will be different depending upon your set of numbers and needs analysis and your ability to follow your plan.  This program is simply a guide to help you gain a better understanding of the relationship of how an HECM works versus a HELOC in achieving essentially the same goal.  Through proper counseling you will need to make your own decision as to which methodology will work best for you and you should not depend solely upon this paper in making your decision.


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