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Can Life Annuities Enhance Reverse Mortgages

Can Life Annuities Enhance Reverse Mortgages?

Do you want to make your reverse annuity mortgage less risky and more enticing? If yes, enhancing a traditional Home Equity Conversion Mortgage (HECM) can help.

It lets the borrower buy a life annuity by increasing the loan amounts at the start. The subsidy repays the loan principal and interest while the borrower remains safe in the house.

It reduces the risk of the loan balance exceeding the mortgaged home value. You can also transfer loan balance from before loan origination to earlier dates where the home’s value is more than the borrower's rate.

1. Old Fixed-Debt Reverse Annuity Mortgages Can Help

It’s possible to make reverse mortgages less risky by linking them to annuities, just like older fixed-debt reverse annuity mortgages (RAM) did in the 1970s.

The fixed debt RAM used the house’s mortgage loan to buy a life annuity for the borrower and splits the borrower and lender's payments.

2. Life Annuities and Reverse Mortgages

The primary link between life annuities and reverse mortgages divides the senior's home into two distinct parts. The current owner derives the first benefit by living in the house for the rest of their life. The second benefit accrues to all subsequent owners.

3. Annuity-Enhanced Reverse Mortgages

In the case of a HECM, adding a life annuity to the debt amount pays interest through the loan life. It also reverts to the borrower if the borrower moves while still alive. This lets them pay the regular savings plan interest rate and a mortality premium.

So adding an annuity to the loan lets the annuity payment cover more than the annuity interest. It also pays more interest on the principal, thus making the total loan balance grow slowly.

You however don’t start at a 100% loan-to-value but take half the remaining equity to buy an annuity. This way borrowers moving out of the home while alive receive an annuity payment that lets them cover a comparable home’s rent.

Examples of possible scenarios where this helps are when a younger wife vacates the house she shared with a recently-deceased, older husband.

4. Reduces Costs

An annuity enhancement proposal can help reduce the upfront costs because no-one pays anything upfront. On the contrary, it’s added to the house debt. And with debt rotating, you may have more debt upfront, but end up with less debt later on.

Best Ways to Implement:

There are two possible implementation options.

The first involves getting a sale-leaseback where the borrower receives more cash upfront to spend any way they want. There’s also a life annuity offer that guarantees to pay the home rent as long as they live in the house.

There is no risk of running out of cash because the borrower can turn the annuity component into a sale-leaseback.

The second option is FHA offering a HECM contract as a ‘blessing’. It makes it easier for dedicated reverse mortgage officers to provide borrowers with better rates. There are minimal risks of the borrower not having equity when they sell the house.

However, the disadvantage here is that the loan won’t help much if the borrower dies just before origination. On the bright side, the borrower performs better and has lower fees, if they stay in the house for a long time.

In short, yes, life annuities do enhance reverse annuity mortgages.

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What does Bank Statement Mortgage Loans mean?

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5 Reasons why seniors should treat their homes as one of their Retirement Income Source.

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