Some people think that reverse mortgages are complicated in the way the loan amount is calculated. While it is different than a regular mortgage, it is not complicated.
Before I get into the details of how these numbers, I want to take just a minute or two to review how reverse mortgages work.
A reverse mortgage is an FHA insured loan specifically designed for homeowners 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. The home stays in the homeowner’s name so they must continue paying the homeowner's insurance and property taxes as well as maintain the home. FHA insured reverse mortgages are called Home Equity Conversion Mortgages (HECM).
There is no fixed Loan-to-Value ratio with reverse mortgages as like there is with conventional mortgage loans. The interest rate and
Loan-to-Value are not dependent upon each other as with conventional loans.
The amount that someone can receive from a reverse mortgage is based on three factors:
- The age of the youngest homeowner or non-borrowing spouse
- The value of the home
- The expected interest rate
Lenders use the age of the youngest borrower or eligible non-borrowing spouse because the older a borrower is, the more they can qualify for. However, the loan only comes due when the last borrower or non-borrowing spouse permanently leaves the home. The older homeowner may pass away but the loan is not due as long as the spouse is still in the home and this can be an additional five, ten or more years in which interest can accrue. Younger borrowers – or borrowers with younger non-borrowing spouses – generally qualify for less.
Value of the home
For calculation purposes, lenders use the lesser of the home’s value or the HECM loan limit of $679,650. This value is called the “maximum claim amount” (MCA).
Expected interest rate
HECM loan amounts rely on long-term interest rates the reverse mortgage industry calls “expected rates” (ER). When rates are expected to be high,
HUD reduces the amount they allow the lender to loan because the interest compounding is expected to be faster through the life of the loan.
Alternatively, lower expected rates produce higher loan amounts.
To summarize, the older the borrower, the higher the home value and the lower the expected rate, the more money will be available.