Philadelphia Weekly

REAL ESTATE

Unique benefits of tenure annuity HECM

Temporary modification enables seniors to grow monthly payments

By Inman News Feed

Add Comment | Comments: 0 | Posted Oct. 15, 2012

The beauty of the monthly tenure option is that the senior supplements retirement income immediately yet is free to adjust to changing circumstances by switching to a credit line. She can do this in order to draw more, or the reverse.

If she does not need any cash draws for three years, for example, she can switch to a credit line and allow the line to grow untouched for three years, then switch back to a monthly tenure payment that would be larger than the one she had earlier. Note further that senior 3 has exactly the same property value protection as senior 2. The monthly tenure option has it all.

Status of three seniors at Age 80 who take HECMs on $300,000 homes at Age 70: Senior 1 takes maximum upfront cash; senior 2 takes maximum credit line; and senior 3 takes maximum monthly tenure payment

Assumptions		Status At Age 80
Interest rate (1)	Annual growth in home value (2)	Loan balance (3)	Property value (4)	Equity (5) [4 minus 3]	Credit line (6)	Credit line less equity (7) [6 minus 5]
Senior 1: Maximum cash withdrawal of $192,900 at Age 70 using standard fixed-rate HECM
4.75%*	4%	$361,878	$444,073	$82,195	0	-$82,195
4.75%*	0%	$361,878	$300,000	0	0	0
Senior 2: Maximum credit line of $187,900 at age 70 using standard adjustable-rate HECM
2.49%*	4%	$15,980	$444,073	$428,093	$272,960	-$155,133
2.49%*	0	$15,980	$300,000	$284,020	$272,960	-$11,060
6%	4%	$22,663	$444,073	$421,410	$387,117	-$34,293
6%	0	$22,663	$300,000	$277,337	$387,117	$109,780
8%	4%	$27,642	$444,073	$416,431	$472,181	$55,750
8%	0	$27,642	$300,000	$272,358	$472,181	$199,823
Senior 3: Maximum monthly tenure payment of $866 beginning at age 70 using standard adjustable-rate HECM
2.49%*	4%	$142,220	$444,073	$301,853	$146,721	-$155,132
2.49%*	0	$142,220	$300,000	$157,780	$146,721	-$11,059
8%	4%	$199,010	$444,073	$245,063	$300,813	$55,750
8%	0	$199,010	$300,000	$100,990	$300,813	$199,823

*Current rate

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.