Amount Of Money Available From A Reverse Mortgage Disappoints Some Seniors

1/14/2008

posted by N. Sioris

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With the recent surge in popularity of reverse mortgages, more and more senior homeowners are looking into this unique type of home equity loan. However, some seniors are disappointed with the amount of money that they can actually receive from a reverse mortgage.

One of the common misconceptions about reverse mortgages is that the loan amount allowed by the lender will be similar to that of a conventional forward mortgage. Many people assume that 75 to 80% of the value of the home will be loaned on a reverse mortgage loan. Unfortunately this is not the case.

A reverse mortgage is almost the opposite of a "forward" mortgage. Because a reverse mortgage is a rising debt, falling equity loan, the lender must factor in several variables in order to insure that the equity that is being paid out to the homeowners, plus the accumulated interest does not exceed the value of the home at the anticipated time that the lender will be repaid. In other words, the lender is factoring life expectancy and home appreciation into the calculations, so that at the time the homeowners permanently leave the home, the lender is in a break even situation and not "underwater" on the loan.

Because life expectancy is such a large part of the equation, the loan to value necessarily must be lower than on a forward mortgage. The beauty of a reverse mortgage is that the homeowner does not have to repay the loan until he permanently moves out of the home or passes away. The house stands alone for the debt, not the heirs or the estate. Consequently, the lenders will try to predict what the outstanding loan balance will be based on the life expectancy of the youngest borrower. Using actuarial tables, the current interest rate, and the value of the property at the time the reverse mortgage is initiated, the lender will determine the loan amount that is available for the reverse mortgage.

Reverse mortgage loan amounts can sometimes be as low as 35 or 40% of the current appraised value if the borrowers are young (close to 62). For someone that has just turned 62, conceivably that borrower could remain in the home another 30 or more years. Therefore, the lender must factor into the loan amount, the accumulated interest for those 30+ years. The lender then factors in an annual appreciation figure for the property and makes a calculated risk that the home will be able to pay off the balance of the reverse mortgage when the home is sold or refinanced after the seniors permanently leave the home.

If the lender miscalculates and the reverse mortgage loan balance is greater than the value of the home at the time of repayment, the lender is then reimbursed the shortfall from the FHA Mortgage Insurance fund, (if the loan is a HECM reverse mortgage,) not the heirs or the estate.

Sometimes you will hear complaints about the high closing costs associated with a reverse mortgage. One of the components of the costs is the 2% FHA Mortgage Insurance Premium that all HECM loans require. If the mortgage insurance was not available, there would be very few lenders in the market today that would offer non-recourse reverse mortgages. The risk of a shortfall would be too great and the lenders would simply not be offering the product.

The older the homeowners, the higher the loan to value percentage for the reverse mortgage loan amount. Obviously, this is because the life expectancy is shorter and the loan repayment date will be sooner. To see how much money you can qualify for, request a free personalized reverse mortgage evaluation today.