Formula for Reverse Mortgage Rate Calculations
So far the most popular reverse mortgage program you can find is the Home Equity Conversion Mortgages (HECM) program. Not all homeowners can qualify for this program, only those that are at least 62 years of age can.
Financial institutions such as banks and mortgage lenders fund HECM programs, while the federal government backs them. HECMs are popular because when you do your calculations, they have the least expensive reverse mortgage rates you can find. This calculation in itself is a formula for success.
If you are one of those seniors who are caught up in the reverse mortgage hype, there is no incentive or formula for rushing directly into it. In fact, the federal government, through the Department of Housing and Urban Development (HUD), requires that you talk to a reverse mortgage counselor before you apply for a loan. Your counselor will tell you about eligibility requirements (such as your age), make calculations on how this program could impact your finances, and inform you if the program is even the right one to use at your age.
When you meet the eligibility requirements, you can apply for a loan with a reverse mortgage lender at current rates. Reverse mortgage rate calculations are then made to determine how much money you qualify for. The formula for determining the amount of mortgage is dependent on:
- The borrower’s age,
- The calculated market value of the home,
- Current interest rates, and
- The maximum loan amount in the borrower’s county.
In general, the older you are, the more money you can borrow. The formula for this is as follows; if you have $250,000 in home equity and are age 62, you can get $110,000. For the same equity amount, you can qualify for $149,000 if you are age 76. Use our loan calculator to see around how much you can get.
The loan amount is derived from the mortgage limit of the Federal Housing Administration (FHA) in the area. It is for this reason that the amount given in reverse mortgage loans can sometimes be limited.
If you have paid off your home’s mortgage or are in the process of completing the payment, you can qualify for a reverse mortgage. The money can be paid to you in a lump sum amount, monthly payments or as a line of credit. There are also hybrid formula payment schemes: combination line of credit with monthly payouts. Each individual must make the calculation and decide which formula will work better for him.
Using HEMC reverse mortgage loans, you are not required to pay until you are dead or have permanently moved out of the house. Reverse mortgage lenders recover the loan (principal plus interest rates) when the home is sold. The rest of the sale amount is then turned over to the principal’s heirs.
If, based on certain calculations, the proceeds of the house’s sale are not enough to cover the loan, HUD pays the difference. The Federal Housing Administration collects a claim on the borrower’s insurance policy. The insurance premium is charged to the borrower and is equivalent to a 2% rate of the allowable loan amount. Annual premiums are then set at .5%. Stand-alone homes, condominiums and other HUD-approved dwellings are eligible under the reverse mortgage program. You do not qualify if you live in a trailer home.
Reverse mortgages are popular because senior citizens can still keep their homes although they have taken out a loan against their home’s equity.