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Writing Devices	Types of Home Equity Conversion Plans Available to the Aged by Philip B. Springer Home equity conversion plans can broadly be divided into loan plans and split equity plans. In the loan plans, the aged homeowner accumulates a debt to be paid off at some future time. In the split equity plans, the aged person sells the house and the equity is split into ownership rights that belong to the buyer-investor and occupancy rights that are maintained by the aged person for life. Loan plans can be divided into those that guarantee lifetime tenure and those that do not. The former involve a nonrepayable debt--that is, the debt does not have to be repaid until the aged person dies or sells the house. The latter involve a repayable debt--that is, the debt is repaid over a given term. Bot loan and split equity plans may use public subsidies. All these characteristics are considered in the discussion that follows. Each plan is described and evaluated according to the income it provides to the aged person and what the aged person has to give up in return. All plans have advantages and disadvantages that need to be understood and carefully weighed before a decision can be made as to which is preferable in one's individual situation. A tabular summary at the end of this article compares the characteristics of the various plans discussed. Rising Debt Loans For Tax Deferral Description. One public plan that guarantees occupancy and provides some saving of income is a deferred tax payment plan. Indirect loans are made by the State to the aged homeowner so that his or her real estate taxes will not have to be paid until death or the sale of the property. The interest charged on the deferred taxes is usually below the market rate, and thus this plan constitutes a public subsidy. Since public money is involved, there is generally a means test for participation in the plan. California, among other States, has used this arrangement. The relatively small amount borrowed on the house of a low-income person who is charged a low interest rate would not be expected to accumulate to a debt so large as to exceed the home equity--the collateral for the loan. For example, assume the $600 average annual tax on a $50,000 home is deferred for 20 years and the interest rate is 6 percent. The terminal debt, about $22,000, can easily be paid by the estate. This open-ended loan is possible only because of the relatively small amounts involved. Advantages. The clear benefit is the out-of-pocket saving of a significant and growing expense for elderly homeowners. Disadvantages. Since only a small portion of home equity is converted, little income saving is available. Further, the program is usually means-tested, which limits the program's applicability. Combination Loan-Equity Plan Description. None of the plans discussed so far provides for the possible appreciation of the aged person's house. This plan involves the aged homeowner accruing both a debt and the obligation to share with the lender the possible appreciation in the house's value. This instrument is called a reverse shared appreciation mortgage, or reverse SAM. Specifically, the aged homeowner receives monthly loan installments at below-market rates in exchange for giving the investor a share of the appreciation. The investor's share of equity could be 50 percent or more--even 100 percent. A greater share provides a greater annuity. The payment continues for life, or until the homeowner wishes to sell. At sale or death, the loan balance, including interest plus the share of the appreciation, is due. Annuity income is related to life expectancy as well as to initial home value. In the past, open-ended reverse annuity mortgages were not possible even on a small scale because some persons would live longer than expected and their debt could easily exceed home equity at death. With mortality risk-sharing and appreciation sharing, these rising debt loans are now feasible. A model of the reverse SAM was presented in a recent study, which discussed offering adequate profits to attract investors. For a woman aged 72 (with life expectancy of about 12 years), a reverse SAM will provide an annuity of $34.20 per $1,000 of initial property value, or $200 per month on a $70,000 house. The model assumes a 12.4-percent mortgage interest rate and 100 percent appreciation sharing. In comparison, a term reverse annuity mortgage for a period of 12 years with a higher market interest rate of, say, 14 percent, would yield an annuity of $35.67 per $1,000 of home value, an amount similar to the payment provided by the reverse SAM. Since the reverse SAM provides guaranteed payments for life--not just for life expectancy--the reverse SAM's total payments could be higher. Of course, the trade-off for higher payments is appreciation sharing. Another example: Consider a woman aged 85 with a life expectancy of 5 years. With a reverse SAM, she could receive a yearly annuity of $70.50 per $1,000 of initial home value. Although this is much more than what the woman aged 72 could receive, it is relatively low. With a term RAM for 5 years at 14 percent she would receive $151.28 per $1,000. True, the reverse SAM provides a lifetime guarantee of occupancy and payments, but a woman aged 85 could take out a term RAM at 14 percent for 8 years--3 years more than life expectancy--and still receive at this interest rate $75.57 per $1,000 of initial home value, which is more than the reverse SAM would provide. Advantages. Payments and occupancy are guaranteed for life and the debt can be paid off at any time. Disadvantages. In cases where there is 100 percent sharing, the homeowner cannot take out future home loans based on the appreciation since any appreciation has accrued to the lender. Under the term RAM, on the other hand, appreciation represents an asset against which the homeowner can borrow. A further disadvantage is that if the homeowner dies early (that is, before life expectancy), he or she has given up all home equity--initial value plus appreciation--in exchange for a minimal number of payments.