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July 2, 2021
Many people are concerned about the costs associated with a Reverse Mortgage, as well as the impact interest rates have on both how much can be borrowed now and the future balance owed.
… then the upfront costs of a Reverse Mortgage should not be a significant issue.
Additionally, understanding how interest rates — as well as home appreciation — impact future home equity can help alleviate concerns (or at least help you better understand how it all works).
Reverse Mortgage fees are generally only a disadvantage if you intend on moving out of the house in a short period of time. While Reverse Mortgage interest rates and fees can seem high and do indeed amount to a significant sum, the costs are not a burden to the homeowner since they are usually financed by the Reverse Mortgage itself (so there are not any out of pocket expenses).
In this article, we will help you to understand:
To help explain these details, we created an example of a fairly typical Reverse Mortgage loan. This example shows the Reverse Mortgage loan amounts, charges, and interest rates for a 70-year-old retiree, with a $300,000 house and a $50,000 mortgage.
After reviewing this article, use a Reverse Mortgage Calculator to see how much money you could receive from a Reverse Mortgage on your own home.
There is currently only one Reverse Mortgage type that is widely available — the HECM Reverse Mortgage. This loan can be used on your existing home or to purchase a new home. Depending on how you take your loan amount, you can opt for either a fixed rate Reverse Mortgage (meaning the interest rate never changes as long as you hold the loan) or an adjustable rate Reverse Mortgage (your interest rate can go up or down and are tied to current market rates).
HECM programs are available from HUD-approved lenders. These lenders must adhere to the rules and regulations structured by Congress. The maximum fees and lending limits for the HECM are set by law.
Additionally, there are a growing number of proprietary products being offered directly by lenders, such as Jumbo Reverse Mortgages. These loan options typically do not have the same costs or restrictions as HUD HECM programs, and they allow high home value homeowners to access more of their home equity..
In most cases, the HECM is the most widely available and appropriate option. But, if you have a higher home value or perhaps want to access a reverse line of credit on top of your existing mortgage, you may want to consider proprietary offerings. Also, in some states there are proprietary options for higher value condominiums that are not FHA-approved for the HECM program.
HUD-approved lenders will determine your actual loan amount by using:
The HECM lending limit nationwide is set at $970,800 for 2022. As the HECM Reverse Mortgage program is administered by the Department of Housing & Urban Development, legislation may increase (or decrease) this amount in the future. When calculating your loan amount, lenders will use the lesser of your home value or this lending limit.
In the following sections, we detail Reverse Mortgage loan amounts, fees, and interest expenses for a fairly typical homeowner.
Using the sample data listed above and rates at the time of article publication, a borrower may expect the following:
Now that we have an initial starting point for this Reverse Mortgage, we can calculate the various fees this sample client could expect to finance in the loan.
For many borrowers, the number one benefit of securing a Reverse Mortgage is eliminating ongoing traditional mortgage payments. If you have an existing mortgage — or any other liens against your home — they must be paid off using the funds from your Reverse Mortgage. You may not have both a traditional mortgage and a Reverse Mortgage at the same time.
Eliminating your traditional mortgage payments can be an excellent way to improve your monthly cash flow in retirement.
In this example, the $50,000 mortgage is paid off — leaving a sum of money that can be used as the homeowner sees fit — depending on the type of loan that has been chosen.
Following the deduction of the upfront fees and the payoff of the existing mortgage (a Reverse Mortgage borrower must always pay off any existing mortgages and other liens against the home), the borrower in our Reverse Mortgage example is left with the following amounts available in the form of lump sum cash or line of credit.
The amount of cash available and when it is available to a Reverse Mortgage borrower varies depending on the type of loan you receive.
Adjustable Rate: With an adjustable rate Reverse Mortgage loan, the borrower must put all funds that are available after the payoff of liens into a line of credit or a tenure (monthly payments). A portion of the line of credit is considered immediately available (Max Upfront Cash).
There are two main advantages associated with the line of credit option:
In this example, the borrower has a total of $108,774 in money available to them — to be used in anyway they wish. However, this borrower is only allowed to withdraw $39,654 (60 percent of their loan principal limit minus the mortgage payoff amount and closing costs) in the first year of the Reverse Mortgage. The remaining $69,120 (plus annual increases) can be tapped thereafter.
Fixed Rate: With a fixed rate loan, the cash you can access from the loan is more limited. If you opt for a fixed rate loan, you are only allowed to withdraw 60 percent of your principal limit. (In this example, 60 percent of $147,900 minus $50,000 mortgage and $14,026 closing costs comes out to $24,714.)
The unusable funds will just remain as your home equity.
Estimate Your Loan Amount
Instead of cash, a Reverse Mortgage borrower may opt to receive monthly payments for their lifetime — but only if they opt for the adjustable rate loan. Monthly payments are not available for the fixed rate Reverse Mortgage.
Monthly lifetime payments can be an excellent way to supplement your lifetime income.
Although you may be concerned about the fees on a Reverse Mortgage, the highest cost associated with this product is interest.
Interest rates for a Reverse Mortgage float on a base of an established benchmark interest rate index and adjust periodically within maximum allowed adjustments and within interest rate caps.
The bullets below show how the HECM Reverse Mortgage loan program calculates interest.
The maximum fully indexed interest rates and interest payments can be a considerable drawback for Reverse Mortgage borrowers. However, Reverse Mortgages have a significant advantage. Interest payments are added on to the principal of the loan (with no payments due until the borrower leaves the property) and the amount due on a Reverse Mortgage will never exceed the value of the property, even if the property decreases in value over the lifetime of the loan.
A Reverse Home Mortgage is not the only way to cash in on your home in retirement. Other ways of getting money out of your home include:
II. Home Equity Loans
While home equity interest rates can be lower than those charged on Reverse Mortgages, the primary disadvantage of home equity loans is that you will have to make loan payments, and if the rate is adjustable, those payments can increase dramatically if interest rates go up. This is often difficult for retirees living on a fixed income. It is also possible to default on a home equity loan and lose your home.
Downsizing can be the most economically efficient way of securing money from your home in retirement. However, the costs of moving are impossible to generalize and declining home values or a soft real estate market may make your home difficult to sell.
Nonetheless, it might be worth your while to consider how much you might be able to sell your house for and how much less you could buy another house for. If considering downsizing, you will also want to factor in the costs of using a realtor to sell your existing house and buy a new house and moving costs as well as the emotional attachment you have to your existing home.
See how downsizing, getting a reverse mortgage, or refinancing could impact your retirement plan by using our retirement calculator and going to the Housing section.
It’s easy to use our Reverse Mortgage Calculator to see quickly how much you may be able to access, as well as access additional resources and connect with a prescreened HUD approved Reverse Mortgage lender to get answers to all your questions — including current interest rates and fees.
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Do the pros outweigh the cons? Get unbiased info on disadvantages advantages and – details on fees, interest rates, loan amounts and more…
Reverse Mortgage Calculator: Understand How Reverse Mortgage Calculations Work, and Find Out How Much You Can Get from a Reverse Mortgage.
Given the right information, many seniors may actually find that a reverse mortgage is a good financial decision for their situation.
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