You are likely aware that the popular Home Equity Conversion Mortgage (HECM) reverse mortgage program offers borrowers a variety of payment options by which they can receive the borrowed funds:

• line of credit - by far the most popular option under which borrowers can draw funds down as needed;
• lump sum
• term - fixed payment for specified number of years
• tenure - equal monthly payments for as long as the borrower remains inthe home
• combinations of the above

We’ve written before about reasons why the tenure option (or “lifetime income plan”) may be the best payment option for seniors - even though relatively few select it. Like an annuity, the tenure payment option provides a regular monthly income stream that can help protect borrowers from outliving their resources.

Now comes a detailed study from the Center for Retirement Research at Boston College that clearly demonstrates that the HECM lifetime income plan (tenure option) is the best financial choice for seniors under almost all scenarios:

“We find that over a wide variety of assumptions about asset returns, the optimal strategy for all but the most risk tolerant households is to take a reverse mortgage in the form of a lifetime income. We are informed by the National Reverse Mortgage Lenders Association that only a small minority of borrowers choose this option, as most choose a line of credit. Our findings appear to be yet another manifestation of the widely documented reluctance of households to annuitize their wealth in retirement. There are substantial differences in reverse mortgage equivalent wealth among strategies, and in our base case a household with average housing and financial wealth…would be 33 percent better off taking a lifetime income at age 65 relative to taking a line of credit when financial wealth is exhausted.”

(From “OPTIMAL RETIREMENT ASSET DECUMULATION STRATEGIES: THE IMPACT OF HOUSING WEALTH, Wei Sun, Robert K. Triest, and Anthony Webb - November 2006 - emphasis added)

The study is based on an analysis of actual historical investment returns for the period 1975-2005 and simulates outcomes under a variety of potential scenarios and assumptions. As an academic study, the paper is, unfortunately, not an easy read for the average person. Much of it focuses on details of the methodolgy and other academic issues.

Still, as the reverse mortgage marketplace continues to grow, the study highlights an important issue that reverse mortgage counselors, lenders, policymakers and, most importantly, borrowers need to be cognizant of: Most senior homeowners would be financially better off choosing the lifetime tenure payment option. But, according to this graph from AARP’s HECM counselor training materials, only about 5% of HECM borrowers historically have chosen the tenure payment option:

Not only do the study’s findings run counter to the actual decisions being made by reverse mortgage borrowers, but also to much of the information and advice being given to potential borrowers. For instance, popular literature on reverse mortgages tends to be somewhat biased toward line of credit option because of the flexibility it offers and the fact that the HECM credit line “grows” while it remains unused. Examples:

“A credit line. You decide when and how much you wish to withdraw. This is, sensibly, the most popular choice.” (The Reverse Mortgage Advantage, p.99)

“This is what I believe to be the remarkable feature of the reverse mortgage…No other mortgage that I know allows this type of growth in a line of credit.” (The New Reverse Mortgage Formula, p.29)

Hopefully the Boston college study will spur additional discussion on the issue.

Social tagging: Reverse Mortgage Payment Options > Reverse Mortgage Pitfalls > Reverse Mortgage Tips

A Few More Related Articles of Interest:

HECM Line of Credit Gains in Popularity Among Reverse Mortgage Borrowers

More From Fidelity: Reasons Why Retirees Avoid Guaranteed Income Options

Reasons Why People Don’t Choose Lifetime Payments

‘Guaranteed Income Gap’ Study Has Implications for Reverse Mortgage Borrowers

Reverse Annuity Mortgage Can Be a Sensible Strategy