Understanding the Reverse Mortgage Payment Calculation
This article explains how reverse mortgage amounts are calculated, emphasizing factors like borrower age, property value, interest rates, and regional loan limits. It guides borrowers through understanding eligibility, costs, and payment options, while highlighting the importance of professional advice for optimal planning.
The Home Equity Conversion Mortgage (HECM) program stands out as the most widely used reverse mortgage option because it is insured and supported by the federal government. HECM loan rates tend to be lower than those offered by other programs, thanks to government backing and strict qualification requirements. There’s no fixed formula for calculating the exact loan amount; instead, several key factors influence it. These include the borrower's age, the appraised property value, current market interest rates, and the pre-approved loan limits set for specific regions.
The primary element impacting the eligible loan amount is the FHA-approved mortgage limit for each area. This means that loan values can vary significantly depending on geographic location. The eligible borrowing amount is determined by comparing the property’s appraised value with the FHA limit; the lower of the two is used. The expected rate incorporates the current 10-year LIBOR swap rate and the lender’s margin, with the age of the youngest qualifying spouse used to calculate the Principal Limit Factor (PLF).
To determine the initial upfront costs, include the loan origination fee, closing costs, and the initial mortgage insurance premium. Borrowers should assess how much they can afford to pay upfront, whether sourcing funds externally or relying solely on the loan. Additionally, considering life expectancy helps in evaluating the borrower’s financial stability. The final calculation combines the PLF, costs, and set-asides to arrive at the total available HECM credit. This credit can be disbursed through tenure or term payments, tailored to the borrower’s specific financial needs. Consulting a reverse mortgage counselor can provide clarity and assist with financial planning for those seeking such loans.
