Reduce or Eliminate Your Current Mortgage Balance.
Utilize the Equity You Have Built Up, Getting Rid of Payments Can Dramatically Improve Your Retirement.
Taking a look at reverse mortgage to reduce and or eliminate your current mortgage loan payments.
Reverse mortgage is a very useful option if someone needs to reduce or eliminate their mortgage payment. Many seniors reach retirement age and still have to worry every month about paying a mortgage payment which can be a substantial portion of cash flow for that household. With diminished income sources, this payment can become very arduous for many retirees. Using a Reverse Mortgage one can use the equity built up in the home to pay off the existing remaining mortgage balance. The major benefit is that the owners can stay in the house, and the title of the house remains with the owners till their demise. There are three requirements to get a reverse mortgage.
1. The people in whose name the title is should have a minimum age of 62. HUD is updating rules on borrowers under the age of 62.
2. Timely payment of property tax and insurance should be made.
3. This should remain as the primary residence till the passing of the title holders (The gap in the stay at the residence cannot be more than one year).
Let us look at a simple scenario where a couple would like to reduce their mortgage payment through reverse mortgage loan.
Jack and Jane Smith are 66 and 64 years old. They had taken a mortgage 20 years back for a house that was then valued at $300,000.
They paid a down payment of $60,000 or 20% of the value and took a 30 year Fixed mortgage loan at 5%. They have been regularly making the payments for the past 20 years and have made 240 monthly payments of $1288.37 till now. They have paid $190,678.70 in interest and $118,530.50 in principal. They have $121,469 to be paid in principal after 20 years. This skewed payment is because in the initial years the major portion of the payment goes towards interest and only in the later years as the principal comes down the interest portion is reduced.
Many seniors in retirement are in a position similar to Jack and Jane and the reverse mortgage was created to provide more options to fund a comfortable retirement.
As they have retired, they would like to reduce or eliminate this payment, so they have greater cash for household expenses. Over the years, the value of their house has increased. Although the housing bubble in the last decade saw astronomical growth in the price of houses but it is generally seen that over a longer term the price of houses grows at a rate of 0.5% to 1% above the inflation rate. We take a lower estimate of 2.5% growth per annum for their house. Over the past 20 years, the value of their home has increased to around $490,000. When they go for reverse mortgage the amount available to them will depend upon:
1. Age of the owners in the title. (If there are two borrowers then the lower of the two ages will be taken for consideration of the loan)
2. Value of the house through an FHA appraisal. (Ceiling limit of the house is capped at $625,500 for these loans)
3. Interest rate available for the loan that right now are still pretty low.
In our case, the lower of the two ages is 64 years that would be taken while calculating the final amount to be given. There are two options for interest rate: either to go for fixed rate that will pay off the mortgage payment, but will give very small amount of lump sum cash. The other alternative is interest that is calculated according to 1 month LIBOR rate (London Interbank Offered Rate). This is the rate at which banks lend each other in the wholesale money market in London.
We can see that there is a continuous difference between the US prime rate and 1 month LIBOR rate.
Let us look at the actual amount which will be obtained in this scenario:
| 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% |
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| 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 |
$490,000 |
|||
| 11 | Home value limit |
$625,500 |
Maximum value to which the home value will be considered | ||
| 12 | Lesser of limit or home value |
$490,000 |
|||
| 13 | Loan principal limit |
$246,960 |
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| 14 | Less Service fee set-aside |
$0 |
|||
| 15 | Available principal limit |
$246,960 |
Principal amount available for use | ||
| 16 | Less Financed Items |
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| 17 | Loan origination fee |
$6,000 |
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| 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 current debt payoff |
$121,469 |
Payment to clear Principal amount left in the mortgage | ||
| 22 | Less Lump-Sum Cash |
$0 |
 |
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| 23 | Fixed-Rate Unusable Funds |
— |
         
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| 24 | Less Selected Creditline |
$114,279 |
Credit line available after the mortgage is paid off | ||
| 25 | Available In First Year |
$15,495 |
Credit which can be used in the first year | ||
| 26 | Available After First Year |
$98,784 |
Available after first year | ||
| 27 | Left for monthly advance |
$0 |
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| 28 | Monthly Advance |
$0 |
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| 29 | No more lien payments |
1,288.00 |
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| 30 | Increase in monthly cash |
$1,288.00 |
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| 31 | Monthly Term |
Tenure |
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| 32 | Total Fees & Costs |
$11,212 |
Total fees and cost involved in taking the loan |
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 the 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.
⇒ Points 17, 18 and 19 show the fees of the program which include origination fees, mortgage insurance and other closing cost. Our websites main goal is to find you a lender that can reduce those fees.
⇒ Point 21 shows the amount that is paid towards the mortgage for Jack and Jane in our scenario.
⇒ Point 24 shows the remaining balance which can now be used as a credit line in the future. No monthly payments are required for this. It can be used as a credit card for major expenses on health, house renovation, etc.
⇒ Point 30 shows the amount we save monthly in payment towards the mortgage.
All the general points for reverse mortgage hold for this situation:
1. The house will be in the name of the owners till their death.
2. If the value of the house decreases in the future, no payment is asked nor is foreclosure of the property done. (This is the reason why 1.25% insurance is taken by FHA to ensure the sustenance of this program even when there are certain losses)
3. Interest will be calculated only on the amount used in the line of credit and from the time withdrawal are made.
4. This loan does not require any monthly payment, nor does it require any particular credit score or income to qualify. (The loan is extended against the property not the owners repaying capacity)
It is possible to have a tenure payment instead of a line of credit.
For tenure payment:
| 1 | Interest rate index |
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| 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 |
$490,000 |
|||
| 11 | Home value limit |
$625,500 |
Maximum value to which the home value will be considered | ||
| 12 | Lesser of limit or home value |
$490,000 |
|||
| 13 | Loan principal limit |
$246,960 |
|||
| 14 | Less Service fee set-aside |
$0 |
|||
| 15 | Available principal limit |
$246,960 |
Principal amount available for use | ||
| 16 | Less Financed Items |
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| 17 | Loan origination fee |
$6,000 |
|||
| 18 | Mortgage insurance |
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| 19 | Other closing costs |
|
Fees attached with the program | ||
| 20 | Net Principal Limit |
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| 21 | Less current debt payoff |
$121,469 |
|||
| 22 | Less Lump-Sum Cash |
$0 |
|||
| 23 | Fixed-Rate Unusable Funds |
— |
|||
| 24 | Less Selected Creditline |
$0 |
No credit line is taken | ||
| 25 | Available In First Year |
$0 |
|||
| 26 | Available After First Year |
$0 |
|||
| 27 | Left for monthly advance |
$114,279 |
Cash available after payment of the mortgage | ||
| 28 | Monthly Advance |
$679 |
Tenure payment till the demise of the owners | ||
| 29 | No more lien payments |
1,288.00 |
Reduction in monthly mortgage payment | ||
| 30 | Increase in monthly cash |
$1,966.64 |
Total increase in the monthly cash | ||
| 31 | Monthly Term |
Tenure |
|||
| 32 | Total Fees & Costs |
$11,212 |
Total fees and cost involved in taking the loan |
The only difference of using it as a credit line is in point 27 in which $114,279 is used to get tenure payment of $679 every month.
Important points for tenure payment:
⇒ There will be $679 payment till the demise of the owner or in case of couples both the owners of the house.
⇒ No tax will be incurred on this payment as it is counted as the loan amount. (However for specific cases it is better to consult a tax adviser)
⇒ According to point 30 we can see that there is a net benefit of $1966.64 in terms of monthly expenses for a couple.
This is a massive relief for any retired couple and combined with other investments and social security it can help to ensure a comfortable and fulfilling life for the owners of the house.