How to model a reverse mortgage into early retirement simulations?

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fleenshop
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How to model a reverse mortgage into early retirement simulations?

Post by fleenshop » Sat Sep 03, 2016 12:20 pm

I'm running simulations of early retirement to see what the odds are that our funds will last under various scenarios. I'd like to try modeling in a hypothetical reverse mortgage. (We will own a home free and clear, and have no kids to leave it to, but I do understand that reverse mortgages have high fees and other drawbacks.)

I found the calculator that's been posted here before:
http://www.reversemortgage.org/About/Re ... Calculator
But I don't understand the output. I don't understand what each of the three columns is, and which of the numbers in them are the ones I'd put into the simulators. I also don't understand item 9 of the inputs and its impact on the outputs.

The scenario in which we'd consider a reverse mortgage is if we saw, late in life, that we were drawing down our assets more quickly than was likely to be sustainable, and that the reverse mortgage would restore a sustainable drawdown rate for life. So, I'd imagined modeling in a monthly tenure payment from a reverse mortgage as an income stream. But I've since learned that reverse mortgages that offer tenure payments are much less common than those that offer lines of credit. I'm guessing I shouldn't assume that the former will still be available at all decades from now, when we'd potentially get the reverse mortgage. But I don't understand how we'd use a line of credit in our example scenario, how I'd enter the line of credit into a simulator (as a lump sum? an income stream?), and which number(s) from the calculator's output page I'd use. If anyone can explain in basic terms, I'd appreciate it!

mhalley
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Re: How to model a reverse mortgage into early retirement simulations?

Post by mhalley » Sat Sep 03, 2016 12:27 pm

http://www.i-orp.com/ Has a reverse mortgage as part of its calculations.

SuzBanyan
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Re: How to model a reverse mortgage into early retirement simulations?

Post by SuzBanyan » Sat Sep 03, 2016 1:32 pm

You should take a look at this paper by Wade Pfau from late last year: http://papers.ssrn.com/sol3/papers.cfm? ... id=2685816

It compares the possible outcomes between using a reverse mortgage early or late.

itstoomuch
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Re: How to model a reverse mortgage into early retirement simulations?

Post by itstoomuch » Sat Sep 03, 2016 2:45 pm

When I investigated, I called RM as an annuity, spia.
Some simulations don't do annuities well so I called it anmuities as a pension.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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whaleknives
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Re: How to model a reverse mortgage into early retirement simulations?

Post by whaleknives » Sat Sep 03, 2016 6:54 pm

fleenshop wrote:. . . I found the calculator that's been posted here before: http://www.reversemortgage.org/About/Re ... Calculator. But I don't understand the output. I don't understand what each of the three columns is, and which of the numbers in them are the ones I'd put into the simulators. I also don't understand item 9 of the inputs and its impact on the outputs.

The 1st column is for variable interest rate adjusted monthly (4.274% to 13.024% max), the 2nd for variable interest adjusted annually (5.787% to 9.537% max), and the 3rd for fixed interest rate (6.310%). All the mortgages have the same Net Principal Limit after initial closing costs. You can use a monthly cash flow less than or equal to the variable rate Monthly Advance or the fixed rate Lump Sum Cash for your initial simulation. You'll probably want to look at the worst case of maximum interest rates as well as your predicted rate. Input item 9 is the desired line of credit, which is deducted from the available lump sum for monthly distributions. You can use it for monthly distributions by drawing on the line of credit, and increasing your mortgage balance.

fleenshop wrote:. . . I've since learned that reverse mortgages that offer tenure payments are much less common than those that offer lines of credit. I'm guessing I shouldn't assume that the former will still be available at all decades from now, when we'd potentially get the reverse mortgage.

A 100% line of credit could in theory be changed to a 100% monthly distribution. But you're right about assuming what any lender would want to give you. Dodecahedron has found that not all reverse mortgage providers are available in her state, and a 2012 Consumer Financial Protection Bureau Report says "the fixed-rate HECM is only available with a lump sum disbursement option, and is structured as a closed-end loan in which borrowers are not permitted to borrow additional funds at a future date. These restrictions are not dictated by HECM regulations, but are a result of market forces."

By the way, that CFPB Report has the most detail I've found about how HECMs work, but you won't know for sure until you actually apply for one.
"I'm an indexer. I own the market. And I'm happy." (John Bogle, "BusinessWeek", 8/17/07) ☕ Maritime signal flag W - Whiskey: "I require medical assistance."

fleenshop
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Re: How to model a reverse mortgage into early retirement simulations?

Post by fleenshop » Sun Sep 04, 2016 5:27 pm

Thanks for the replies, which are helpful but also confirm that I'm in over my head... Further clarifications on the following points would be great.

Whaleknives, I think you're saying that if I were using the default inputs, I'd want to input either $690.99 or $727.33 as monthly income for life. Or, where I suspect that monthly tenure payments might not exist in the market by the time I'd get a reverse mortgage, that I'd instead want to input $99,444 as a 1-time income event in the year that I'd get the reverse mortgage. Is that right so far?

Then, you're suggesting that the first two? or all three? of those amounts might actually need to be adjusted down in case interest rates go up? I don't understand that part. ("You'll probably want to look at the worst case of maximum interest rates as well as your predicted rate.")

Finally, you're saying that in addition to taking the monthly tenure payments in the first two cases, I could take up to another $50,000 out any time it's needed? And that would increase what I'd owe back? ("Input item 9 is the desired line of credit, which is deducted from the available lump sum for monthly distributions. You can use it for monthly distributions by drawing on the line of credit, and increasing your mortgage balance.") But I wouldn't have to pay it back until death or leaving the home, is that right?

Please correct me where I'm off, or let me know if I've got it.

Thanks also for the other comments about how and where I can enter these numbers once I understand them, and about optimizing the timing of actually getting the reverse mortgage. Much appreciated!

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whaleknives
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Re: How to model a reverse mortgage into early retirement simulations?

Post by whaleknives » Sun Sep 04, 2016 10:07 pm

fleenshop wrote:Whaleknives, I think you're saying that if I were using the default inputs, I'd want to input either $690.99 or $727.33 as monthly income for life. Or, where I suspect that monthly tenure payments might not exist in the market by the time I'd get a reverse mortgage, that I'd instead want to input $99,444 as a 1-time income event in the year that I'd get the reverse mortgage. Is that right so far?

Where did "monthly income for life" come from? The HECM calculator shows a Net Principal Limit, which is 50 to 70% of your home's value depending on your age. Whether you receive a monthly payment or a lump sum, the total available is limited and might be gone before you die. You can remain in your home until you move out or die, but you have to continue paying your living expenses, including property taxes, insurance, and home repairs. If you exhaust your home equity, you receive nothing from the sale if you have to move.

fleenshop wrote:Then, you're suggesting that the first two? or all three? of those amounts might actually need to be adjusted down in case interest rates go up? I don't understand that part. ("You'll probably want to look at the worst case of maximum interest rates as well as your predicted rate.")

The variable interest rates of the first two might increase, which would decrease your home equity faster, if you're modeling that.

fleenshop wrote:Finally, you're saying that in addition to taking the monthly tenure payments in the first two cases, I could take up to another $50,000 out any time it's needed? And that would increase what I'd owe back? ("Input item 9 is the desired line of credit, which is deducted from the available lump sum for monthly distributions. You can use it for monthly distributions by drawing on the line of credit, and increasing your mortgage balance.") But I wouldn't have to pay it back until death or leaving the home, is that right?

Yes, the line of credit is not included in the initial monthly distributions, but is available if you need more. Notice that the line of credit is deducted from the Net Principal Limit before calculating the monthly advance; try running it with a zero credit line. Using a line of credit, taking higher monthly payments, or a larger lump sum will all increase the mortgage balance and reduce your home equity sooner.

All the people writing about HECMs, including Wade Pfau, have described them as complex, and the Consumer Financial Protection Bureau Report is 231 pages long. You should look at the Wiki's Reverse mortgages page and its External links, starting with What is a reverse mortgage?.

I think you should probably keep a reverse mortgage in reserve as a last resort, rather than building one into your retirement estimates. :wink:
"I'm an indexer. I own the market. And I'm happy." (John Bogle, "BusinessWeek", 8/17/07) ☕ Maritime signal flag W - Whiskey: "I require medical assistance."

fleenshop
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Re: How to model a reverse mortgage into early retirement simulations?

Post by fleenshop » Mon Sep 05, 2016 11:15 am

Thank you again!

Where did "monthly income for life" come from?

The second to last row of the table says that the monthly term is "Tenure." It says here: http://www.reversemortgage.org/About/Ty ... nt-Options that "Tenure Payment" "provides borrowers with fixed monthly payments for as long as the person lives in the home as a primary residence. Even if the loan balance exceeds the value of the home, the borrower will still receive the same monthly payment."

Unfortunately, while that's the kind of reverse mortgage I think I'd want some day, it's what I'm not confident will be available on the market at that time, as I've read that they've already become uncommon -- less than a tenth of the reverse mortgages made. So, now that I think I understand that's what the first two columns are, I think I should ignore those two columns.

That leaves the last column. But I know that the kind of reverse mortgage that's become common instead is the type that gives the borrower a line of credit, and the last column doesn't have one.

So maybe this table doesn't show the most common kind of reverse mortgage?? And maybe to force it to kind of do so, I have to increase the credit line input to the point that the monthly advances come out as $0? With the default inputs, that's $170,792.25 at the moment.

If so, what I still don't know is what to do with this number in the modeling tools. It's not an annuity or an income event, but a line of credit. I don't know how to treat that.

I think you should probably keep a reverse mortgage in reserve as a last resort, rather than building one into your retirement estimates.

Almost definitely so! But I still want to understand it and try it out.

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whaleknives
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Re: How to model a reverse mortgage into early retirement simulations?

Post by whaleknives » Mon Sep 05, 2016 1:01 pm

fleenshop wrote:
whaleknives wrote: Where did "monthly income for life" come from?

The second to last row of the table says that the monthly term is "Tenure." It says here: http://www.reversemortgage.org/About/Ty ... nt-Options that "Tenure Payment" "provides borrowers with fixed monthly payments for as long as the person lives in the home as a primary residence. Even if the loan balance exceeds the value of the home, the borrower will still receive the same monthly payment." . . .

The Tenure definition correctly states that living in your home as primary residence is a necessary condition for maintaining the mortgage. If you do not live in your home for more than 12 months, the mortgage can be terminated. Likewise, the FHA insurance guarantees that the required loan payments will be made to you, even if the mortgage balance exceeds the current home value. But neither says the lender will pay you more than the principal limit, which is set by HUD and FHA regulations. A reverse mortgage is not a lifetime annuity.
"I'm an indexer. I own the market. And I'm happy." (John Bogle, "BusinessWeek", 8/17/07) ☕ Maritime signal flag W - Whiskey: "I require medical assistance."

fleenshop
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Re: How to model a reverse mortgage into early retirement simulations?

Post by fleenshop » Mon Sep 05, 2016 1:42 pm

whaleknives wrote:
fleenshop wrote:The second to last row of the table says that the monthly term is "Tenure." It says here: http://www.reversemortgage.org/About/Ty ... nt-Options that "Tenure Payment" "provides borrowers with fixed monthly payments for as long as the person lives in the home as a primary residence. Even if the loan balance exceeds the value of the home, the borrower will still receive the same monthly payment." . . .

The Tenure definition correctly states that living in your home as primary residence is a necessary condition for maintaining the mortgage. If you do not live in your home for more than 12 months, the mortgage can be terminated. Likewise, the FHA insurance guarantees that the required loan payments will be made to you, even if the mortgage balance exceeds the current home value. But neither says the lender will pay you more than the principal limit, which is set by HUD and FHA regulations. A reverse mortgage is not a lifetime annuity.


Are you positive? I thought the whole point of tenure payments, and a huge component of the appeal of that type of reverse mortgage, was the lifetime income. What I quoted above continues on for another sentence: ..."The payments only stop when the borrower passes away or permanently leaves the home." It doesn't say, "... or until the limit is reached."

But either way, I still think that tenure payments may not be available in the market by the time I want them. Which still leaves me with the question of how to model in a line of credit, and which amount would be the right one to use for that.

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whaleknives
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Re: How to model a reverse mortgage into early retirement simulations?

Post by whaleknives » Mon Sep 05, 2016 4:26 pm

fleenshop wrote:
whaleknives wrote:. . .A reverse mortgage is not a lifetime annuity.

Are you positive? I thought the whole point of tenure payments, and a huge component of the appeal of that type of reverse mortgage, was the lifetime income. What I quoted above continues on for another sentence: ..."The payments only stop when the borrower passes away or permanently leaves the home." It doesn't say, "... or until the limit is reached." . . .

I was positive, but it looks like I was also wrong. Although not technically a lifetime annuity, the monthly payments are structured to last until age 100, but won't even stop then. This is from a third-party HECM counselor training manual:

    6.1 PAYMENT PLANS
      A. The tenure option provides equal monthly payments to the borrower for as long as the borrower lives in the home as a principal residence.
        1. This plan provides the long-term security and convenience of a monthly income supplement that lasts until the borrower dies, sells, or moves. (Although the loan balance is scheduled to equal the principal limit when the youngest borrower reaches age 100, payments continue for as long as the borrower lives in the home as a principal residence, no matter how long that is.) emphasis added
        2. Remember that tenure payments are not “for life”; they are for “as long as the borrower lives in the home”. Payments would stop if the borrower moves elsewhere.
        3. The payments are a fixed amount; they do not change from month to month and are not adjusted to account for inflation. In the future, they will probably buy less than today because of inflation.
        4. Tenure payments are not affected by interest rate changes during the life of the loan. Payment amounts are calculated using the expected rate that was in effect at the time of loan origination.
        5. Tenure payments are very convenient for the borrower, because the payments are disbursed automatically on the first of each month, and can be direct deposited to the homeowner’s bank account, so that no action needs to be taken to get the money.
      Introduction to Home Equity Conversion Mortgages (HECM), HO 111, NeighborWorks Training Institute, pg. 57
"I'm an indexer. I own the market. And I'm happy." (John Bogle, "BusinessWeek", 8/17/07) ☕ Maritime signal flag W - Whiskey: "I require medical assistance."

fleenshop
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Re: How to model a reverse mortgage into early retirement simulations?

Post by fleenshop » Mon Sep 05, 2016 5:47 pm

Ok, well good to confirm that at least! Thanks for checking even though you felt sure.

I still don't know how to model a line of credit into a simulator, and whether the way I proposed of figuring out what that number should be is any good. So, unless more advice is forthcoming, looks like I'll have to go with your initial suggestion of leaving reverse mortgages out of the model and just getting around to it as a last resort if it becomes relevant some day.

michaeljc70
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Re: How to model a reverse mortgage into early retirement simulations?

Post by michaeljc70 » Wed Sep 07, 2016 5:34 pm

I use my own Monte Carlo simulation and have added an "emergency funds" feature. I put the amount of emergency funds and it will tell me what % of the scenarios it had to use that money (all other money ran out). In my case the emergency funds would be a reverse mortgage or selling my place and renting. I would imagine other tools have a feature like this.

I hope not to have to do it, so knowing the % of scenarios I run out of $$$ (other than my home) is useful.

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