How is a Reverse Mortgage Calculated?
Information
accurate as of
March 8, 2019
in Blog

How is a Reverse Mortgage Calculated?

Seniors considering a reverse mortgage often ask “How much money can I get from a reverse mortgage?” or “How much can I borrow?” The amount a borrower can receive from a reverse mortgage, also referred to as a Home Equity Conversion Mortgage (HECM), varies. With a HECM, borrowers cannot cash out on 100 percent of their home equity. Instead, the maximum funds available is calculated by using the following:

• Age of the youngest borrower on title or eligible non-borrowing spouse1
• The lesser of the appraised value of your home, sales price, or the Federal Housing Administration (FHA) lending limit ($726,525 as of 1/1/2019)
• Current interest rates
• Balance of your existing mortgage, if applicable, and other financial obligations

An example of how a reverse mortgage is calculated2
Michael is 68 and his wife Lisa is 65. Their home was recently appraised at $300,000, and they have an existing mortgage balance of $70,000. They are looking to retire; but, are concerned that they do not have enough cash flow or overall savings to do so. Their friend has a reverse mortgage and is satisfied with the product. After hearing about her experience, they decide to reach out to a lender to research their options.

They speak with a lender about their financial goals and get a quote. Michael and Lisa are eligible to access $115,327 of their home equity with a reverse mortgage. Since a reverse mortgage requires that there are no other liens on the property, they have to use the proceeds from their loan to pay off their existing mortgage. After paying off their $70,000 conventional mortgage, there is $45,372 in proceeds that they could receive as cash, or they could use the funds as a line of credit that will continue to grow over time.3

What else is used to calculate a reverse mortgage?
Another factor that affects the amount a borrower may receive is whether it is a fixed-rate or an adjustable-rate loan. The fixed-rate (only available as a lump sum) maintains the same interest rate over the life of the loan. The amount you are able to access is also limited to the first-year draw limits; this generally means that you may not be able to borrow as much as you could with an adjustable-rate loan. The adjustable-rate HECM allows you to access your proceeds through a variety of options. Borrowers can choose to receive equal monthly payments for the life of the loan (tenure) or monthly payments for a fixed period of time (term). In addition, borrowers can leave the funds in a line of credit3 that may grow over time if unused.

Additionally, when getting a reverse mortgage, there are other costs to consider such as the mortgage insurance premium (MIP), origination fee, appraisal fee, closing costs, and set-aside fees to name a few. Some of these costs and fees can be financed into your loan. If you choose to do that, it’s important to understand that those costs are a part of your unpaid principal balance.

To calculate how much you may be eligible to receive from a reverse mortgage, try our reverse mortgage calculator above or call 1 (800) 976-6211 to talk to a licensed loan advisor.

Important Disclosures

1A spouse must meet the following requirements to be considered eligible: 1) Be the spouse of the reverse mortgage borrower at the time of loan closing and remain the spouse of the borrower for the duration of the borrower’s lifetime. 2) Be properly disclosed to the lender at origination and specifically named as a Non-Borrowing Spouse in the loan documents. 3) Occupy, and continue to occupy, the property securing the reverse mortgage as the principal residence.

2This example is based on a 65-year-old borrower, a variable rate HECM loan with an initial interest rate of 4.896% (which consists of a Libor index rate of 2.375% and a margin of 2.375%). It is based on an appraised value of $300,000, origination charges of $5,000, a mortgage insurance premium of $6,000, and other settlement costs of $2,673. Interest rates may vary and the stated rate may change or not be available at the time of loan commitment.

3The reverse mortgage loan balance grows at the same rate as the available line of credit. Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.