A reverse mortgage, also known as a HECM, can be a valuable way for homeowners to convert some of the equity in their home into much needed cash. Backed by HUD and insured by the FHA, these loans are just one of the many tools designed to help homeowners 62 years and older during their retirement years.
While traditional mortgages require you to make monthly payments to your lender, a reverse mortgage lets you receive funds from your lender. In other words, as long as the HECM terms are met, you are not required to make any monthly payments.
Many people find a reverse mortgage helpful in paying off a current mortgage, buying long-term insurance, paying for home repairs, or financing their post-retirement lifestyle. If you’re thinking of turning a portion of your home’s equity into cash through an HECM, here’s how to calculate how much you may qualify for.
Reverse Mortgage Loan Calculator
A reverse mortgage or HECM loan calculator works by determining your eligibility and the amount you may qualify for. It’s based on factors like your home’s value, any existing mortgage, and your current age. You must be 62 years of age or older to be approved for an HECM. Other calculated details include:
- The amount you may qualify for (before fees). This figure is determined by your home’s value, your age, and HUD’s current principal limit factor.
- How you receive your payments: lump sum, monthly, a line of credit, or any combination of the three.
- Whether the amount you qualify for is enough to include paying off your existing mortgage as part of the transaction.
To qualify for an HECM loan, you must continue to live in the home and agree to pay property charges like taxes and insurance. The monthly payments you receive are not taxable, but you should talk to your financial adviser about any questions you might have.
When using a HECM loan calculator, here are the most important definitions to keep in mind:
- A lump sum advance, or the starting balance or amount you expect to receive immediately from your reverse mortgage.
- The total number of years you plan to draw from the HECM.
- The monthly loan advance, or the total monthly amount you plan to receive on top of the lump sum advance.
- The annual interest rate for the loan.
Not included in the HECM loan calculator may be costs like mortgage insurance premiums, the origination fee, any third-party charges, and any loan servicing fees.
How Payments are Received
There are many ways you can receive your reverse mortgage payments. For adjustable interest rate loans, there are five payment plans for you to choose from:
- Term: fixed monthly payments for a specified period of time.
- Modified term: a combination of line of credit plus monthly payments for a fixed period of months that you select.
- Line of credit: unscheduled installments in any amount and at whatever time you choose.
- Tenure: fixed monthly payments for as long as at least one borrower lives in the home as the primary residence.
- Modified tenure: an established line of credit and fixed monthly payments to the borrower.
If you prefer a fixed interest rate mortgage, you can receive a single lump sum payment at the mortgage closing.
An important note: no matter which loan option you choose, you always have three calendar days to change your mind and cancel the loan.
Is a Reverse Mortgage Right for You?
Many older Americans like the idea of getting money for the equity in their home, but it’s important to weigh in the possible downsides. For example, some people don’t like the idea of leaving their home to their heirs with a lot of debt attached to it.
The best way to know if a HECM is right for you is to do your homework and ask a lot of questions before taking such an important step. The industry continues to evolve, with improvements that highly favor homeowners. In the final analysis, a reverse mortgage may end up being the safest, securest way for you to turn your home’s equity into an additional source of income in your later years. Contact Rick for more information.