July 2019
“No Costs” Reverse Mortgages
Is that even possible? The answer can either be “yes” or ” no” because it depends upon the type of loan that is being used and the size of the new mortgage.
In traditional mortgages, by buying up the interest rate, the Lender can utilize credits they receive from the “investor” by passing that along to the borrower. The borrower does have to be okay with the higher interest rate if they want to do a loan at zero points and/or not pay for any closing costs.
It is the same procedure with a reverse loan. The higher the rate, the lower the fees and sometimes that results in a “zero” cost loan. But again, the trade off is a higher interest rate. If a senior is sensitive about having a higher interest rate, that will result in a larger loan balance in the future, that may not be a good option for them.
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Each borrower has their own personal situation and reasons why they are looking to apply for a reverse loan, and there isn’t any one answer for them as to whether or not to save on the loan costs by having a higher interest rate, or pay the costs through the new loan, and have a lower interest rate,.
They have to see their options and the details in a professionally prepared loan proposal for their consideration and to personally meet with a Reverse Loan Consultant before they apply for the loan.
Reverse Loans and Maximum Claim Amount
Calculations for determining a loan amount on a traditional mortgage rely on a certain percentage of the appraised value of the subject property, and are referred to as the “Loan to Value” figure and can be as high as 100% of the appraised value of the property, but are generally less.
However, the calculation used to determine the loan amount for a reverse loan is completely different and can be confusing for the consumer and is called the Principal Limit and is the total borrowing power available to the borrower when they apply for the mortgage.
Just what are the steps in the calculation that is used to determine the reverse mortgage amount?
The adjusted property value of the property is multiplied by the “Principal Limit Factor (PLF) which is based on the age of the youngest borrower or non-borrowing spouse and increases for older borrowers.
The Maximum Claim Amount (MCA) is the lesser of the property’s appraised value or the National Lending limit for FHA which as of the writing, is $726,525.
If we were using the term “Loan to Value” ratio, the percentage will always be less than what can be gained from a traditional loan, because there are no required mortgage payments, thus the loan amounts will be smaller than on a traditional mortgage.
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The life expectancy of the youngest borrower effects how much money the loan will provide and the younger they are, the less money they will receive and conversely, the older borrower will receive considerably more money due to the PLF because their life expectancy is shorter and there is less likelihood of the loan balance exceeding the value of the property in the future.
It is important to understand that “shopping” for a reverse mortgage and calling a multitude of different Lenders about their reverse loans, is a waste of time. Every Bank or Broker utilizes the exact, same method to determine the loan amount, as it is the methodology that is uniform to the reverse loan industry.
This is a brief explanation of how reverse loans are calculated and will be different for each person, but I hope this helps and takes away the confusion for seniors and their families.