This reverse mortgage calculator figures how much money you can borrow against your home as a security and what your remaining equity balance will be after a certain number of years. Everything there is to know on how to deal with this financial product below the form.
How does this reverse mortgage calculator work?
This is a solution designed to help people aged 62 or over, in simulating a retirement plan based on a reverse mortgage product. The minimum data that should be provided in order to perform this calculation type consists in a single lump value by case and/or a desired monthly income stream to be paid by the lender for a specific number of years by considering a fixed interest rate that applies to the payments received and an assumed constant appraised home value would be useful. It returns the information detailed below while its algorithm basically applies the compound interest formula for both a capital accumulation value and for a future value of payment series:
Your ending reverse mortgage balance meaning how much theoretically you have to pay at the end of the period with the equity in your house.
It is marked with [A] = A1 + A2. Where:
A1 = ( (1 + r)n ) * LS
A2 = MIS * ( ( (1 + r)n+1 - (1+r)) / r)
Total payments you’ll have received over the specified time frame. It is marked with B.
B = LS + MIS * n
Total interest accumulated for the payments received.
C = A - B
Remaining equity balance in your home at the end of the period.
D = AHV - A
LS = Lump sum in advance
MIS = Monthly income stream
r = Annual interest rate/1200
n = Term in years * 12
AHV = Current appraised home value
What is a reverse mortgage?
The term of reverse mortgage refers to a loan type that can be taken by homeowners who are aged 62 or over, that allows them to use part of the equity in their home to finance the retirement period. It helps especially retirees with limited financial possibilities that need to have a resource designed to cover the basic living expenses. It should be mentioned that this product type doesn’t put any sort of restriction on how the money are being used.
It is the opposite of a classic mortgage as the payback stream is the following: the lender makes any of a single lump sum payment and/or monthly payments to the borrower. The terms that govern this kind of agreement states that the homeowner is not obliged to pay out the loan until the property is sold or until his death. The obligations that the borrower will still have to respect regard the property taxes, home insurance and similar fees.
The main 3 types of reverse mortgage are:
- Single-purpose reverse mortgage which can be taken from specific local and state government agencies and/or non-profit institutions;
- Federally-insured loan which is known as Home Equity Conversion Mortgages. In case of this reverse mortgage type, the U.S. Department of Housing and Urban Development is the institution responsible for giving assistance;
- Proprietary reverse mortgage which is a financial product that is very similar with a private loan agreement.
The following are the cumulative eligibility criteria to be analyzed before taking this type of loan:
- The borrower should be aged 62 or older.
- The borrower should own the property outright and live within the home, or in case there is a current mortgage balance secured with the house, its value should be low.
- Only specific types of properties are accepted for a reverse mortgage. Amongst them are: detached houses, townhouses and condominium units FHA approved. Mainly the home should be dwelled by a single family or consist in two up to four units that are owned and resided.
Reverse mortgage payment types
The owner of a reverse mortgage contract can negotiate to receive payments from the lender in one of the following ways:
- One time lump sum.
- Monthly payments or the so called monthly stream income.
- Payments via a credit line.
- Any combination of the above 3 options.
This reverse mortgage calculator allows simulation for any scenario such as: only an onetime payment, only monthly income or a lump sum plus monthly payments.
How much you can borrow?
It should be mentioned that the older the borrower is, the more him can borrow. The cash someone can obtain by this product depends as well on the lender’s policies. In most cases, a person that is 62 years old is likely to obtain between 20 – 22% of the home value. Basically to find how much you can actually borrow you just need to add 1% for each year older than 60 to a standard rate of 20%.
The risks of this product
- In general the annual interest rates are higher than in case of most home loans;
- By taking this loan there is a risk in affecting the pension eligibility criteria. That is why before taking this loan you should first contact the Department of Human Services' Financial Information Service and ask how this would have an impact on your pension entitlements.
- In case the interest rates increase, the compounding interest scheme may cause an increase in the pace of the amount owed.
- In case there are individuals that live with the owner of the home, in case him dies they are evacuated.
Example of a calculation result
Let’s take two examples and check them with this reverse mortgage calculator:
Example 1: In case of a borrower that wants to receive a single lump sum of $30,000 taken for 10 years at an average fixed interest rate of 4.5%, while the assumed appraised value of the home is $150,000. He will get the following information:
■ Your ending reverse mortgage balance will be: $47,009.78
■ Total payments you’ll have received: $30,000.00
■ Total interest accumulated: $17,009.78
■ Remaining equity balance in your home at the end is: $102,990.22
Example 2: In case of an individual what wants to receive a lump sum of $20,000 plus $1,000 monthly income, for a period of 15 years at a fixed interest rate of 4.75%, while the property appraised value is $200,000. He will obtain the following results:
■ Your ending reverse mortgage balance will be: $185,959.52
■ Total payments you’ll have received: $140,000.00
■ Total interest accumulated: $45,959.52
■ Remaining equity balance in your home at the end is: $14,040.48
*Please note that both scenarios assume your appraised home value remains unchanged over this period!05 Jan, 2015