Tue. Aug 4th, 2020

Can Life Annuities Make Reverse Mortgages More Attractive

Reverse mortgages have always served seniors in getting cash by converting part of their home equity. The fact that one doesn’t have to make monthly mortgage payments makes them attractive. But is there a way to make these reverse mortgages more attractive? Probably there is.

Enhancing HECM with Life Annuities

Enhancing a conventional Home Equity Conversion Mortgage (HECM) for increasing the amounts of the loan at origination so that the borrower could purchase life annuities can be a good way of making reverse mortgages look more attractive. The annuity can later be used for paying down the principal as well as the interest on borrowed amount while the borrower stays in the property. As a result, the risk of loan balance growing too much to exceed the mortgaged property’s value is eliminated.

When a HECM loan is enhanced with the purchase of life annuity, the borrower can transfer their loan balances from a long time after the loan origination to earlier dates where the property is likely to worth more than what’s owed to the borrower.

The Link between Reverse Mortgages and Life Annuities

A recent study identifies a “natural link” between reverse mortgages and life annuities. The link is drawn from the idea that there could be two distinct parts of the value of a property that a senior owns.

The first part is the benefits that would be derived by the current owner as they stay in the home for their remaining lifetime. The second is the benefits accrued to the subsequent property owners after their demise. This first part almost equals net operating income’s discounted value which the property owner would have received had they rented the home out to somebody else.

The flow of the benefits would be larger if the life of the owner is longer and maybe funded effectively by some life annuity with its payouts indexed to the net rent of the property.

Reverse Annuity Mortgage

The key to a reverse mortgage becoming more attractive is to add some life annuity to the HECM which largely remains the same as the product in its current form.

Just think of a HECM keeping all the other terms and conditions the same; almost 50 percent loan-to-value, same mortgage insurance premium, same interest rate. That means you’d be adding life annuity to your debt amount. It will keep paying the interest during the loan repayment period and will revert to the borrower if they move while alive. So, they’d be entitled to paying a normal rate of interest on their savings in addition to a mortality premium.

That said, this new reverse annuity mortgage would help ensure that the annuity payment covers a lot more than the interest accrued on the annuity while paying a little interest on the principal amount to make the total balance of the loan grow even more slowly.

Now, when this borrower moves out of their property and is still alive, he’d be entitled to an annuity payment that covers the complete rent of a similar home. So, that makes adding life annuities to reverse mortgages a very good idea. Please visit here for more details: https://www.blakemortgage.com/reverse-mortgage 

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