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Making Your Money Last

How to Size Up a Reverse Mortgage

Do the math to figure your total cost or the equity remaining when your loan ends.

When you shop for a reverse mortgage, lenders must give you the total annual loan cost (TALC), the equivalent of an annual percentage rate. But this doesn't reflect how your pattern of withdrawals will affect your total cost or the equity when the loan ends.

AARP has developed a model that lets counselors and lenders give you a customized analysis. Golden Gateway Financial, a reverse-mortgage broker, has an online calculator that uses AARP's model to let you compare loans.

At GoldenGateway.com, click on "Do the math." Input your age, estimated home value and zip code (to determine whether your home's value exceeds the Federal Housing Administration limit for your area). The program generates your loan options, which you can sort by loan limit or by interest rate.

The table below summarizes the results in March for a homeowner in northern Virginia whose home is worth $350,000 and who has a $50,000 mortgage balance. It assumes an upfront withdrawal of $50,000 to pay off the mortgage. We ran the numbers two ways: with a loan term of 20 years for a 62-year-old and ten years for a 72-year-old.

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Different ages, different payouts

Age Loan term (yrs.) Initial loan limit Max. monthly payment Total cost Cash received Equity remaining
62 20 $146,588 $676 $426,752 $262,240 $77,901
72 10 175,484 1,370 171,009 264,400 82,676

Interest. Most lenders charge a variable rate based on the one-year Constant Maturity Treasury or LIBOR index plus a margin of one to one and a half percentage points. In March, lenders at Golden Gateway offered rates ranging from 4.86% to 5.55%. The loan used in the example had an initial rate of 5.28%.

Initial loan limit. This is based on your age (or that of the youngest co-borrower), the value of your home and its location (see the accompanying article). The older the borrower, the higher the limit.

Maximum monthly payment. This amount depends on how much you initially withdraw as a lump sum or reserve for a line of credit. In our example, the younger buyer qualifies for a much lower monthly payout.

Total cost. In addition to interest, the lender can currently charge up to 2% of the home's value (or the FHA limit, whichever is less) for the origination fee. Lenders can also charge for such things as an appraisal and title search. Plus, you'll pay a monthly servicing fee of $30 to $35.

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For the federally insured home equity conversion mortgage, you'll pay mortgage insurance of 2% of your home's value upfront, plus 0.5% added to the interest rate on your loan.

Equity remaining. This is the amount of equity you're projected to have left at the loan's end. In the table, the younger borrower's remaining equity is only slightly lower because we assumed 4% per year annual appreciation -- the historical average.

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