Create a Guaranteed Lifetime Income Source.
You Have Already Built Up the Equity, Your Home Can Give you Retirement Income for Life
Taking Reverse Mortgage for Tenure payments
Longevity is a key concern for all seniors in retirement, learn how you can extend your savings and create new income sources.
As the baby boomer generation retires, more and more people in this group are looking at ways to enhance their monthly income. To ensure that after retirement you are able to live a comfortable lifestyle one needs a sizable retirement or investment fund. However, there is another program that can help a large percentage of retirees to enhance their income significantly. This is the reverse mortgage program also called Home Equity Conversion Mortgage (HECM) which is insured by the U.S. Federal government. This allows individuals or couples to keep the possession of their house till their demise after which the property is transferred to the lending bank in exchange of providing a regular payment during their lifetime.
Let us look at a simple scenario for an average couple who has retired and wants to enhance their monthly income and at the same time keep the possession of their house.
Ben and Mary Miller have retired a couple of years back. Ben is 71 years old, and Mary is 70 years old. They get regular social security payments and have a bit of savings but would like to increase their income to meet additional expenses of home assistance and a couple of other minor expenses. They have a house that is located in safe neighborhood near their friends and family, and they expect to reside in the same house for the remaining years. The house is valued at $350,000 and is debt free. By taking a reverse mortgage, they will be unlocking the equity within their house to get additional payments.
A few points about the reverse mortgage:
1. If there are two individual mentioned as the owner in the title of the house, the lower of the two ages will be considered while calculating reverse mortgage. (Age is an important factor on which the monthly payment is dependent)
2. The lower of the two ages should be more than 62 years.
3. The payments will continue till either of the individuals is living.
4. Reverse mortgage does not require the credit score of the individuals.
5. The title and possession of the house will remain with the owners till they are living.
6. This house should be a primary residence, and it should not be left vacant for more than one year.
7. This payment is non-taxable as it is counted as a loan payment by the lender. (Still for specific cases it is best to visit a tax adviser)
8. This is a non-recourse loan. This means that if the final amount received by the couple in their lifetime is greater than the price of the house when it is sold, the lender cannot ask for remaining funds from the borrower or the estate.
Let us look at the actual amount which will be obtained by Ben and Mary through this reverse mortgage.
| 1 | Interest rate index |
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| 2 | Plus lender’s margin |
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| 3 | Initial loan interest rate |
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| 4 | Plus mortgage insurance | 1.25% | 1.25% Margin of the FHA which is insuring the entire program | ||
| 5 | Initial total loan rate | 3.90% | |||
| 6 | Initial creditline growth rate | 3.98% | |||
| 7 | Lifetime cap on loan rate | 12.65% | Maximum interest rate within this program | ||
| 8 | HECM Expected Rate | 5.21% | |||
| 9 | Monthly Service Fee | $0.00 | |||
| 10 | Value of the home | $350,000 | |||
| 11 | Home value limit | $625,500 | Maximum value to which the home value will be considered | ||
| 12 | Lesser of limit or home value | $350,000 | |||
| 13 | Loan principal limit | $187,250 | |||
| 14 | Less Service fee set-aside | $0 | |||
| 15 | Available principal limit | $187,250 | Principal amount available for use | ||
| 16 | Less Financed Items |
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| 17 | Loan origination fee | $5,500 | |||
| 18 | Mortgage insurance |
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| 19 | Other closing costs |
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Fees attached with the program | ||
| 20 | Net Principal Limit |
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Final Principal available | ||
| 21 | Less Lump-Sum Cash | $0 | |||
| 22 | Fixed-Rate Unusable Funds | — | |||
| 23 | Less Selected Creditline | $0 |
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| 24 | Available In First Year | $0 | |||
| 25 | Available After First Year | $0 | |||
| 26 | Left for monthly advance | $177,442 | Amount available for payments | ||
| 27 | Monthly Advance | $1,111 | Monthly payments made to the household | ||
| 28 | No more lien payments | 0 | |||
| 29 | Increase in monthly cash | $1,110.91 | Increase in monthly cash | ||
| 30 | Monthly Term | Tenure | |||
| 31 | Total Fees & Costs | $9,808 | Total fees and cost involved in taking the loan |
Table 1
Some of the major points to be noted in the above table:
⇒ Rate: Points 1, 2 and 4 show the three major rates which are applied. The LIBOR rate, the lender’s margin and the FHA insurance margin. Only LIBOR is variable and changes according to the market condition.
⇒ Point 15 shows the available principal amount for a loan. This is generally 55-60% of the actual value of the home and is dependent on the age of the title holders, current interest rate and the assessed value of the house.
⇒ Point 17, 18 and19 show the fees of the program which include origination fees, mortgage insurance and other closing cost.
⇒ Point 26 shows the final amount available from which monthly payments will be made.
⇒ Point 29 shows the final increase in monthly income available to the couple. In this case, it is $1110.91 per month for the rest of their lives.
This tenure payment depends on three important factors:
1. Age of the owners: The younger owner’s age( in case of two owners) will be used to calculate the tenure payments. If the payments are started at a later age, the monthly payments will be Higher.
2. Value of the house: If the value of the house is higher the payments will be proportionally higher. The maximum limit for the house value is $625,500. If the house is valued at a higher amount, the payments will be made according to the uppermost ceiling of $625,500.
3. Current mortgage: If there is a prior mortgage on the house the available principal will be used to first clear the outstanding mortgage on the house. After this payment is made the remaining principal will be used for tenure payment. (In our scenario Ben and Mary have paid the mortgage on their house and hence the entire principal is available for tenure payment, hence they get a higher monthly payment)
Let us look at an alternative where they start the payments 5 years earlier when Ben and Mary were 66 years and 65 years respectively.
| 1 | Interest rate index |
|
|
||
| 2 | Plus lender’s margin |
|
|
||
| 3 | Initial loan interest rate |
|
|
||
| 4 | Plus mortgage insurance | 1.25% | 1.25% Margin of the FHA which is insuring the entire program | ||
| 5 | Initial total loan rate | 3.90% | |||
| 6 | Initial creditline growth rate | 3.98% | |||
| 7 | Lifetime cap on loan rate | 12.65% | Maximum interest rate within this program | ||
| 8 | HECM Expected Rate | 5.21% | |||
| 9 | Monthly Service Fee | $0.00 | |||
| 10 | Value of the home |
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|||
| 11 | Home value limit |
$625,500 |
Maximum value to which the home value will be considered | ||
| 12 | Lesser of limit or home value |
$350,000 |
|||
| 13 | Loan principal limit |
$177,450 |
|||
| 14 | Less Service fee set-aside |
$0 |
|||
| 15 | Available principal limit |
$177,450 |
Principal amount available for use (This is lower than the earlier case because of lower age of owners) | ||
| 16 | Less Financed Items |
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|||
| 17 | Loan origination fee |
$5,500 |
|||
| 18 | Mortgage insurance |
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| 19 | Other closing costs |
|
Fees attached with the program | ||
| 20 | Net Principal Limit |
|
Final Principal available | ||
| 21 | Less Lump-Sum Cash |
$0 |
|||
| 22 | Fixed-Rate Unusable Funds |
— |
|||
| 23 | Less Selected Creditline |
$0 |
|
||
| 24 | Available In First Year |
$0 |
|||
| 25 | Available After First Year |
$0 |
|||
| 26 | Left for monthly advance |
$167,642 |
Amount available for payments | ||
| 27 | Monthly Advance |
$1,003 |
Monthly payments made to the household | ||
| 28 | No more lien payments |
0 |
|||
| 29 | Increase in monthly cash |
$1,002.82 |
Increase in monthly cash(In comparison to $1110.91 calculated earlier) | ||
| 30 | Monthly Term |
Tenure |
|||
| 31 | Total Fees & Costs |
$9,808 |
Total fees and cost involved in taking the loan |
Table 2
The only difference is in point 29 in which instead of getting $1110.91 the couple will be getting $1,002.82 as they started the loan at an earlier age. We can see that because of the lower age of the owners the monthly payments are lowered by ($1110.91-$1002.82) = $108.09.
Using reverse mortgage payments in addition to social security payments can be a great way to increase the monthly available income to meet the growing needs during old age. It can ensure that you are not dependent on financial assistance from anyone and you have a fulfilling phase of your life.