Reverse Mortgage Guide
We hope that the information provided in the Beginners Guide to Reverse Mortgages has been helpful for you, whether you are considering a reverse mortgage or not. The intent of the guide is to allow you to better understand the nuances of the reverse mortgage and let you make your own decisions by providing you with the tools and references you deserve.
Reverse Mortgage Calculators
In this section, we take it to the next level in helping you understand how you can increase your cash flow and supplement your retirement with a reverse mortgage. There are a whole host of reverse mortgage calculators out there, you can find your own or you can use some of the more prevalent calculators available such as those with AARP or National Reverse Mortgage Lenders Association also know as www.nrmla.org. These are free reverse mortgage calculators and available to anyone that wants to use them. For the purpose of our example, we will be using the NRMLA calculator.
You will need to enter a few bits of information into these calculators; your birthdate(s), your present home value, your zip code and if you currently have a mortgage, the amount of that mortgage. The reverse mortgage calculator will provide you with several very important bits of information that we will break down for you. Here is what that screen looks like:
Once you have clicked the Calculate button, you will see this screen:
What you see above is the first screen it gives you for the information you had provided. For the sake of the example, we entered a birth date of 01/01/1938 for a 70 year old person living in zip code 20005. The home's estimated value (an appraisal will determine actual value) is $400,000 and they have an $80,000 mortgage. Other information that could be entered is monthly payments or desired credit line but lets focus on the key parts of the reverse and you can experiment with the data after that. Another note is that we will explore only the Monthly Adjustable HECM and not the Annual or the Fannie Mae program. Neither perform as well as the Fannie Mae Homekeeper will no longer be a program by year's end.
The first line for the Monthly Adjusting HECM 1) is the amount of equity you could access with this reverse mortgage and in this example that amount is $171,018 after the $80,000 mortgage is paid. The different parts of line 2) show how that money could grow in value over time and the examples are for 5 years and 10 years along with the current growth rate of 3.75%. From an earlier version of the Beginner's Guide to Reverse Mortgages, you know that the credit line growth rate depends upon the current index (either CMT based or LIBOR based) plus a margin (currently 1.75 or 2.00% for CMT or 1.50% for LIBOR) plus .50%. The constant is the margin and .50% but the index varies and changes monthly. It is currently at almost historically low rates for reverse mortgages so if that index increases, your credit line growth will increase with it. As mentioned before, a 15 year average of the CMT is 6.05 so your reverse mortgage has an upside as far as its growth is concerned.
Line 3) shows the amount of monthly income you could get from your reverse mortgage. This is called a Tenure payment and it is guaranteed for as long as you live in the home, regardless of the home's value. If you live to be 100 years old, you will be guaranteed this payment each and every month. In the example, the payment is $1051 for the Monthly Adjustable HECM.
If you click on the Loan Summary button you will get this screen:
What you see here from top down is the current index based on CMT or 1-year Treasury of 1.44% along with the lender's margin of 1.75% and that adds up to 3.19% for the current interest rate. When you add the .50% HUD Mortgage Insurance you have 3.69% or the rate at which any money you have borrowed with the reverse mortgage will accrue interest and this is called the Initial Rate. The cap on this interest rate is 10% more than the start rate, so the cap is 13.69%. The Initial Rate will never be more than 13.69% on your reverse mortgage if you took the application today.
The line called Growth Rate in Credit Line is very important for many reasons, most notably the word GROWTH. Any money put into the credit line will grow at a rate equal to the current index plus margin plus the .50% and its compounded so the number in this example is 3.75%. Remember that if the index increases, so does your growth. If the average over the past 15 years is 6.05%, your growth would have been the same. In this example, you see that after paying off the existing $80,000 mortgage, there is $171,018 left. At the very top of this graphic you will see a line that says Enter Your Desired Credit Line Here. If you were to put the $171,018 in that field you would the last 2 lines at the bottom showing your projected credit line growth in 5 years and in 10 years. For this example the client would have access to $205,611 in 5 years and $247,201 in 10 years. This money can be used at any time the client needs cash and it takes from 3-10 days to request that money from the servicing company in the form of a letter or fax, no phone calls. Some folks use the annual growth to pay bills at the end of the year and in some cases that growth is significant. That screen would then look like this.
Next line you will see the example home value of $400,000 and then the Nationwide Home Value Limit of $417,000. To determine all the numbers for your reverse mortgage, you take the lesser of the Value of the Home or the Lending Limit. In this example we will use $400,000 because it is lower than $417,000. If the home's value was $500,000, we would use $417,000.
The next line shows the Loan Principle Limit which is determined by a complex algorithm based on actuarial tables and other data and there is really no set rule for how this data is determined but that info is provided by HUD and not the independent brokers or lenders. In the example the limit is $274,000.
The next 3 lines are the associated costs of the reverse mortgage: the origination fee which is based on 2% of the first $200,000 and then 1% of the remaining amount with a cap of $6000. For this example (2% x $200,000= $4000) plus (1% of $200,000=$2000)= $6000. The Mortgage Origination Fee or MIP is 2% of the lesser of the home value or lending limit. In this example it is 2% of $400,000 or $8000. The rest of the fees are based on typical real estate closing costs that include appraisal, title, credit report, counseling fee, attorney fees, etc. The example here is for $4102.
The next line is somewhat confusing to most folks but its really quite simple. Because HUD is a governmental function, they employ a service fee and its reflected here at $4880 for this example. The monthly service fee is usually $35 but instead of you paying that amount each month, they have "kindly" set aside that amount each month for the next 12 years in this example. You don't pay it, its reserved and there is no interest that accrues on that amount, its simply paid to the servicer each month through your reserve.
After taking out the Origination Fee, the MIP, Closing Costs and the service set aside fee you are left with $251,018 in this example. This is the amount of equity you have access to and any mortgage you are paying off would come from this amount. Since the example shows a $80,000 mortgage, the new Net Principle Limit is $171,018. This amount would be the amount you would leave in your credit line until you needed money from it.
The last line is the available monthly Tenure payment or the amount of money you could receive each month for the entire time you remained in your home, even if the amount you used was more than the home's value.
You can play with these calculators to show different amounts based on what you owe, what you pay each month. You can see that the older the person, the higher the net principle limit for them. Certainly the higher the home value, the higher the fees associated with the loan.
Now here's what we are going to do. Below this text is a retirement calculator that shows how much money you have accumulated through your retirement and also what your monthly income is. With that information you can find out how much you desire to take each month or year for your living expenses. This is a great tool to use to see how long your investment portfolio could last you if you took a certain amount each month from that portfolio bucket. In this case, if you had a $200,000 retirement nest egg and access to the $171,018 as shown by the reverse mortgage example you can calculate how long that money could last if used as a supplement to your fixed retirement income. Whether you choose to take the monthly tenure payment and add it to your monthly income or you take the credit line and add that to the amount of money you have access to through retirement, you can figure out a very important fact. That fact is you can increase your monthly cash flow by significant amounts using a reverse mortgage and the home remains yours throughout the time you live there. You may have other retirement calculators that you have access to, some with monthly draw capabilities or ways to change expected growth. Either way, by using the reverse mortgage, you now know how you can greatly impact your monthly income capabilities and it may not be what you were expecting. ONLY MORE!
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