There are no fixed loan-to-value ratios with reverse mortgages. The amount a borrower can receive from a reverse mortgage depends upon three factors:
- The age of the youngest borrower (or eligible non-borrowing spouse)
- The value of the home
- The “expected” interest rate
Based on current interest rates today, the average amount that someone can expect to receive is between 38% - 59% of the value of the home, or the HECM loan limit ($679,650). What this means is that for every $100,000 in value, you can receive between $38,000 to $59,000.
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I know that just this little bit of information opens the door to many more questions. Before I talk further about the amount of money available, I want to make sure we’re on the same page about exactly what a reverse mortgage is.
About 98% of all reverse mortgages originated in the United States are insured by the Federal Housing Authority (FHA). The name for the FHA reverse mortgage program is the Home Equity Conversion Mortgage (HECM).
The HECM is a loan specifically designed for homeowner’s age 62 and above, that allows them to convert a portion of the value of their home into tax-free
money, without having to sell their home, give up the title, or obligate themselves to a monthly mortgage payment.
Since the home stays in the homeowner’s name (the bank does not take title to the home), there are conditions that the homeowners must meet to keep the loan in place:
- Pay the property taxes on time
- Keep the home insured
- Maintain the home
- Occupy the home as their primary residence
Please note that the homeowners are not required to make a monthly payment, but they can make payments if they choose with no penalty. However, this is
not free money. The borrowers are still charged interest, they just do not have to pay it on a monthly basis.
The customer has the benefit of no mortgage payments, but every month, the interest that is charged is added to the loan balance, so the balance continues to grow over the life of the loan. This is truly a 100% negative amortization loan.
The loan only becomes due and payable when the last homeowner (or eligible non-borrowing spouse), permanently leaves the home. At that time, the heirs inherit the home and have six months to either sell the home or refinance the reverse mortgage (with up to two 90-day extensions for a total of 12 months).
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Now that you have a basic understanding of how the HECM reverse mortgage works, let’s go into the breakdown of how we calculate the amount of the reverse mortgage.
The amount that we can loan is called the “Principal Limit” (PL). This would simply be called the loan amount in the forward mortgage world.
Age plays an important role in the calculation of the PL. Lenders use the age of the youngest borrower or eligible non-borrowing spouse because younger people are likely to live in the home over a longer time period than an older person. The longer a person keeps the loan, the longer the interest is compounding and the higher the loan balance grows. Therefore, the younger a person is, the less money they can get from a HECM.
Value of the home comes into play because the lender will use the lesser of the home value or the HECM loan limit ($679,650) as the basis for the loan. The HECM loan limit is only used when a property is worth more than the limit.
For example, if someone has a million dollar home, the lender will base the amount of the reverse mortgage on the limit amount of $679,650. In other words, if someone qualifies to get 50% of the value, they would only get 50% of the $679,650 limit, not one million dollars.
The expected interest rate is the long-term rate used in the reverse mortgage industry. When rates are “expected” to be high, HUD reduces the principal limits because interest rate compounding is expected to be faster through the life of the loan. Alternatively, lower expected rates mean higher principal limits.
These are all factored into the calculation that HUD uses to figure out how much someone can receive from a reverse mortgage.
Almost no two people receive the same exact amount from a HECM because everyone’s situation is different.
This is a lot of information in a fairly short article so please feel free to contact me with any questions.