reverse loan calculator

Payment Choices for Reverse Loans

The FHA Home Equity Conversion Mortgage is a reverse loan and along with its many features for seniors, are different ways they can access their funds in the line-of-credit.  They can choose to not take any kind of payment and simply take out some money at the close of escrow, or do a combination of the different options.

  • Cash at the close of escrow with a “tenure” payment.
  • Tenure payment only
  • Modified Term payment and if they want it, cash at the close of escrow.
  • Or no payments at all.   But payments can be set up later if the borrower wishes to have one at any time in the future, as long as there are remaining funds in their account.

Very few of my clients have ever opted for any kind of monthly payment, but let’s take a look at what a Modified Term Payment is.

The borrower chooses a certain amount of money to be sent to them each month, such as $2,000 for 10 years. Depending on the age of the youngest borrower and how much money is available in their account, they will receive it each month but not for their lifetime.

At some point in the future, it will stop being sent to them,  (10 years in this example) but if they still have money in their account, they can set up a new monthly payment, a tenure payment or stop it altogether or request a lump sum.  Again, it depends on how much reserve they have in the line-of-credit.

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Every person has their own unique concern or goal and depending on a number of factors, such as paying off a large mortgage, there may not be enough money left in the account to choose a payment option, but at the least, they will have eliminated their mortgage payment and that would become extra income to them each month.

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Reverse Loans Are Confusing

Generally, in spite of the articles and television commercials about reverse loans, I have found that many people are still quite confused about reverse mortgages and do not understand that they are just like a regular home loan, with the exception there are no mortgage payments to be made by the borrower.

And what I find very surprising is how many professionals, such as traditional Loan Officers, Bankers, CPA’s, Estate Planning attornies and Financial Advisors are very uninformed, and are not qualified to provide their clients with accurate information if their client asks them about it.

This is unfortunate because quite often seniors are relying on them for professional advice and sometimes the professional simply gets it “wrong” and ends up possibly giving them very bad advice.

For a senior who is attempting to learn about the loan and whether or not it should be considered as a possible source of additional funds, it leaves them without too many reliable sources of correct information.  I quite often suggest that they utilize the counseling that is provided by HUD-approved Counseling agencies throughout the country and sometimes it can be done in person.

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Part of my consulting service provides them with several National agencies and 10 that are within California.   They can call any one of them and set up a counseling appointment that can be done over the telephone and learn about reverse loans.

The Counselor provides accurate information and answers the individual’s questions or concerns about them.   At the end of the session, the Counselor will mail a HUD Counseling Certificate that is viable for 6 months.

If the seniors decide to apply for a reverse mortgage, they will give a copy of the Certificate to the Loan Officer to verify that they have been counseled.   This is a HUD regulation and provides a layer of safety for seniors and no one can apply for the loan without having received the counseling.

Speaking with a HUD-approved counselor is a great resource to get questions answered and not end up having a salesperson from a Lender calling them constantly and pressuring them to apply for the loan.

In closing, if anyone who is reading this and would like to have a copy of the Counseling list, just send me an email requesting it and I will provide it to you.

And I will not pester you to apply for the loan.

 

 

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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.

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Reverse Loans and MIP

In the post that I previously shared, I discussed the fees and costs the borrower pays when they originate a reverse loan, and I mentioned the fees were very similar to traditional mortgages with the exception of the Mortgage Insurance Premium.

This insurance fee is quite expensive and gives the reverse loan a reputation for having higher closing costs compared to more traditional loans and I agree.   it is expensive, but it is important to understand why it is being charged and how it protects and benefits the borrower and their heirs.

A reverse mortgage or HECM is insured by the federal government and will be repaid in the future regardless of how long the borrower(s) lives or if the property value declines.   It has a “non-recourse” feature and that means you can never owe more than the property is worth at the time the loan is repaid.

If for any reason all of the equity has been used over the years and now the loan balance exceeds the value of the property, the borrower and or the estate will not have to pay the difference between the two figures, as the MIP will cover the shortfall.

At the time of the loan application and Closing, the fee is currently 2% of the Maximum  Claim  Amount and an annual fee for the life of the loan at .50% that is charged upon the loan balance during the time the loan is active.

I don’t want to make my explanation too complicated or confusing, so, for now, I will conclude my comments but will discuss the fee further in my next post and why it’s such a great benefit to the borrower and their heirs.

I will explain what the Maximum Claim Amount is and also give a bit of information about what a “Principal Limit” is and why the “Expected Interest Rate” and not the Note rate is used to calculate the amount of funds an applicant may receive from their reverse mortgage.

 

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HECM 4 Purchase

Okay, what does “HECM” 4 Purchase mean?   Is is some sort of mysterious formula for investing or making money?   The general public is unfamiliar with this term as are most Realtors.

So what does it mean and why is it something that could be very useful and advantageous for a senior to know about?  Its a type of mortgage that they can use to purchase a home or even a second home such as a vacation property.

And how would they do this?

Buy using funds from a reverse loan.    As long as the borrowers are aged 62 or older and they have funds that could be used for a down payment on an a new property, they could possibly relocate to an area they have always wanted to live in or buy their dream home.

If you want to know more about this special loan program, please contact me for details and or I can provide you with information that is designed especially for you and your dream.

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Within the last year newer and more  affordable reverse loans have been created that allow the borrower more access to the equity in their home if it’s value exceeds 1MM.   And these loans are without origination fees or the FHA MIP insurance, plus the homeowner can borrow up to 4 MM.

 

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