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.
From Kiplinger's Personal Finance magazine, May 2008
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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.
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.
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.
MORE ADVICE FOR YOUR RETIREMENT MONEY
Reader Comments (6)
Posted by: Tobin at 04/10/2008 11:23:29 AM
Not sure why this article is just now hitting the press but the rates for the FHA program you were referring to are now in the 3.6% range with a margin of 1.25 or 1.5 and the LIBOR is pretty much off the table now, its all CMT based. There's never been a better time to look at a reverse mortgage...
Posted by: JB at 04/16/2008 12:35:59 PM
..Doesn't say how the borrower took the money or when. How can a loan limit be $146K but it says the borrower received $262K. An amortization schedule is supposed to make things simpler.
Posted by: RefinancingTips at 04/28/2008 11:09:01 PM
Great read. I think I'll subscribe to this as it has some good info! Thanks.
Posted by: Steve at 05/19/2008 01:38:16 AM
Thanks - I also found the NewRetirement Reverse Mortgage overview useful.
Posted by: GTZ - loan guru at 05/30/2008 11:38:41 AM
Caveat Emptor. If it sounds too good to be true it is. No article I've read discussed the REAL issues with Reverse Mortgages: 1. Events of Default - some non Gov't issured mortgages read like credit card agreements, things like "ANY unpaid claim or lien" is an Event of Default. That means if you have a hospital claiming you owe them $$ (rightly or wrongly), the borrower is in default of their mortgage and the lender can foreclose.... 2) Selling your place gives you 90+% of all the proceeds, while accrued interest on a reverse mortgage will eat away your equity. You'll only get at best, 40,50% and the rest will be eaten away by accrued interest, fees, etc. Keep your money, don't give to the bank.
Posted by: stan at 07/26/2008 02:25:52 PM
Check out reversemortgagecalculators.org