Reverse mortgages may be a great way for those 62 years and older to access the equity they’ve built up in their home over the years. For the most part, the older the borrower, the more in proceeds the borrower will receive.
To determine how much you’re eligible to receive from the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) loan, you need to look at three things:
- Age of the youngest borrower
- Home value
- Current interest rates
With these three pieces of information, borrowers can use a reverse mortgage calculator to estimate how much money they can receive.
How Are Reverse Mortgage Proceeds Calculated?
The amount of money borrowers can receive is calculated using principal limit factors (PLFs), which are published by the Department of Housing and Urban Development.
The PLFs provide the percentage of maximum claim amount allowable in cash draws, given the age of the borrower, and expected interest rates for the loan.
The age of the borrower can have a big impact on the amount of money available from a reverse mortgage.
Do Older Borrowers Receive More in Proceeds?
Typically, yes, older reverse mortgage borrowers receive more in proceeds than younger consumers.
The age difference in the amount of available loan proceeds reflects the fact that the remaining life expectancy for an older borrower on average will be less than that for a younger borrower.
Younger borrowers receive less because HUD expects it will have to pay more over the life of the loan. Below are three examples that will show how age impacts the amount of money available through a HECM Standard loan.
| Age | Home Value |
Mortgage Balance |
Available Principal |
| 62 | $300,000 | $0 | $185,700 |
| 75 | $300,000 | $0 | $207,900 |
| 85 | $300,000 | $0 | $224,100 |
***
As you can see from the three examples above, older borrowers can receive substantially more money than younger consumers.
Reverse Mortgage Borrowers Are Getting Younger
Even though older borrowers can receive more in proceeds from a reverse mortgage, the average age of borrowers continues to fall.
A March 2012 study from the MetLife Mature Market Institute found that over the last 10 years, the average age of HECM borrowers has declined steadily. In the 1990s, the average age of borrowers was between 75.2 and 76.7 and has since declined to 73 in 2010.*
“These findings suggest that younger homeowners are not only more interested in learning about reverse mortgages, but they may also be more likely than older homeowners to take out this loan,” said the report.**
If you have questions about whether a reverse mortgage is the right solution for your situation, contact us today.
*Metropolitan Life Insurance Company (2011)
http://www.metlife.com/assets/cao/mmi/publications/studies/2012/studies/mmi-changing-attitudes-changing-motives.pdf : page 7
**Metropolitan Life Insurance Company (2011)
http://www.metlife.com/assets/cao/mmi/publications/studies/2012/studies/mmi-changing-attitudes-changing-motives.pdf : page 9
***Age Examples:
Age 62:
This example is based on the youngest borrower who is 62 years old, a fixed rate reverse mortgage with an interest rate of 5.06%, an appraised value of $300,000, origination charges of $5000, a mortgage insurance premium of $6000, other settlement costs of $2973 plus a lender credit of $9500, amortized over 252 months, with total finance charges of $512,776 and an annual percentage rate of 6.37%. Lender credits and interest rates may vary.
Age 75:
This example is based on the youngest borrower who is 75 years old, a fixed-rate reverse mortgage with an interest rate of 5.06%, an appraised value of $300,000, origination charges of $5000, a mortgage insurance premium of $6000, other settlement costs of $2973, plus a lender credit of $9500, amortized over 144 months, with total finance charges of $236,716, and an annual percentage rate of 6.40%. Lender credits and interest rates may vary.
Age 85:
This example is based on the youngest borrower who is 85 years old, a fixed rate reverse mortgage with an interest rate of 5.06%, an appraised value of $300,000, origination charges of $5000, a mortgage insurance premium of $6000, other settlement costs of $2973, plus a lender credit of $9500, amortized over 72 months, with total finance charges of $126,240, and an annual percentage rate of 6.45%. Lender credits and interest rates may vary.