Which HECM reverse mortgage best meets your needs?

Among the challenges faced by seniors considering a HECM reverse mortgage is deciding which HECM best meets their needs. There are both fixed-rate and adjustable-rate versions. Adjustable rate HECMs can adjust annually with a maximum rate increase of 5 percent, or monthly with a 10-percent maximum. Within all of these categories there are multiple combinations of interest rate and origination fees.

The specific HECM that works best depends on the senior's financial needs and preferences. The list below covers five different financial needs, and shows the manner of drawing funds under the HECM that corresponds to each need. I will discuss the HECM selection process in each case (see chart).

Reserve for contingencies: Seniors who want a reserve for contingencies will be offered credit lines on adjustable rate HECMs only - there are no fixed-rate credit lines. She may select the adjustable loan that provides the largest initial credit line, or the one that provides the largest line at some future time, depending on her expectations regarding when she will begin drawing on the line.

The senior who focuses on the largest initial line could find it on either an annual or a monthly adjustable. If they focus on the largest line at some future time, they will select the annual adjustable, unless they are convinced that rates will rise by more than 5 percent above existing levels, in which case they might select the monthly adjustable.

Note that seniors selecting among alternative credit lines can ignore the interest rate and origination fee, which are important to them only because they affect credit lines. This is also the case for the other financial needs discussed below.

Permanent increase in monthly income: Some seniors want more income "permanently," meaning for as long as they occupy their homes. The logical choice would be the adjustable-rate HECM that provides the largest such payment. However, seniors concerned with how much home equity they will leave to their estate might select the HECM that minimizes future debt.

Cash draw: Some seniors need cash for any of the plethora of reasons why people need cash. Home purchase is excluded, however, because it is considered as a separate category below.

Seniors can obtain cash at closing with either a fixed-rate or an adjustable-rate HECM. While the amounts available are very similar, the cash draw at closing ends the process for the fixed-rate option. No additional funds can ever be drawn. With the adjustable, in contrast, a second cash draw is available after 12 months roughly equal to about two-thirds of the draw at closing. A senior looking for the maximum cash over 12 months will take the adjustable offering the largest total. A senior with more modest needs with a concern about the size of her estate might prefer the fixed-rate version that results in the greatest equity after some period.

Combination monthly income and credit line: Some seniors want both a monthly payment and a credit line. She will specify her desired payment, which could be for her entire tenure in the house or for a shorter period, and use the remainder of her borrowing power to draw a credit line. She will select the adjustable-rate HECM that provides either the largest initial line or the largest line after some period - the same decision process as when someone selects a credit line only.

Purchase a house: Most seniors who purchase a house with a HECM want to minimize the asset liquidation needed for the purchase, so they want the HECM that will provide the largest amount of cash up front. This could be a fixed-rate or an adjustable rate, but with interest rates moving up, it is more likely to be an adjustable. In both cases, the senior pays a 2.5 percent insurance premium for the privilege of using all HECM borrowing power at the outset.

The senior willing to draw less than 60 percent of the maximum on an adjustable loan will pay only a 0.5 percent premium and will obtain a significant credit line that becomes usable after 12 months.

Concluding comment: The kosher reverse mortgage calculator on my website shows all the options discussed above, enabling seniors to make the best possible selection. For example, the calculator shows the senior looking for a reserve for contingencies 1) the largest initial credit line available, and also 2) the largest future line after some period of nonuse (the period of which the senior can specify). Defining all relevant options is one feature that makes the calculator kosher.

A second kosher feature is that the calculator covers multiple lenders, which allows the senior to find more advantageous terms. In each of the financial needs considered above, one or two lenders offer better deals than the others.

• Contact Jack Guttentag via his website at mtgprofessor.com.

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Financial needs HECM draw that meets need

1. Need a reserve for contingencies, including the possibility of outliving your money by living too long. Draw the largest possible initial or future credit line, with or without a cash draw.

2. Inadequate income, now and in the foreseeable future. Draw the largest possible monthly payment for as long as you live in the house.

3, Have an immediate need for cash for any purpose except buying a house. Draw as much cash as possible, at closing or after 12 months.

4. Need a reserve for contingencies and more current income. Draw a smaller monthly payment plus the largest possible credit line.

5. Purchase a house with the smallest possible cash outlay. Draw as much cash as possible, at closing.