A reverse mortgage loan is a type of home loan for homeowners 62 and older who have a large amount of home equity. The lender pays the homeowner against the value of their home and the homeowner does not make monthly mortgage payments. The loan is paid back when the homeowner moves, sells their home, passes away, or fails to meet certain requirements.
A reverse mortgage loan can be a useful way to supplement your income in retirement, but it also comes with costs and risks. One of the most important questions to ask before getting a reverse mortgage loan is how much you will owe in the end.
The answer depends on several factors, such as:
• The type of reverse mortgage loan you choose
• The interest rate and fees charged by the lender
• The amount of money you borrow and receive
• The value of your home and how it changes over time
• How long you live in your home and keep the loan
Let’s look at each of these factors in more detail.
Type of Reverse Mortgage Loan
There are different types of reverse mortgage loans, but the most common one is the Home Equity Conversion Mortgage (HECM), which is backed by the federal government. With a HECM, you can choose to receive your money as:
• A lump sum
• A line of credit
• Fixed monthly payments for as long as you live in your home or for a set period of time
• A combination of these options
The type of payment option you choose affects how much interest you will accrue and how much you will owe in the end. For example, if you choose a lump sum, you will receive the entire amount of money upfront and start accruing interest on it immediately. If you choose a line of credit, you will only accrue interest on the amount of money you use. If you choose monthly payments, you will receive a smaller amount of money each month and accrue interest on it over time.
Interest Rate and Fees
The interest rate and fees charged by the lender also affect how much you will owe in the end. The interest rate can be fixed or variable, depending on the type of payment option you choose. A fixed interest rate stays the same for the life of the loan, while a variable interest rate can change based on market conditions.
The fees charged by the lender can include:
• An origination fee
• A mortgage insurance premium
• A servicing fee
• A closing cost fee
These fees can be paid upfront or added to your loan balance. The more fees you pay upfront, the less interest you will accrue and the less you will owe in the end. However, paying fees upfront also reduces the amount of money you can borrow and receive.
Amount of Money Borrowed and Received
The amount of money you can borrow and receive from a reverse mortgage loan depends on:
• Your age (or the age of the youngest borrower or eligible non-borrowing spouse)
• The current interest rate
• The appraised value of your home (or the HECM mortgage limit, whichever is lower)
Generally, the older you are, the lower the interest rate, and the higher the value of your home, the more money you can borrow and receive. However, borrowing more money also means owing more money in the end.
Value of Your Home and How It Changes Over Time
The value of your home and how it changes over time affects how much equity you have in your home and how much money you or your heirs will get when you sell your home or repay your loan.
If your home value increases over time, you will have more equity in your home and more money left over after paying off your loan. If your home value decreases over time, you will have less equity in your home and less money left over after paying off your loan.
However, even if your home value decreases below your loan balance, you or your heirs will not have to pay more than 95% of the appraised value of your home at that time. This is because HECM loans are insured by the federal government and have a non-recourse clause that protects borrowers from owing more than their home is worth.
How Long You Live in Your Home and Keep the Loan
The longer you live in your home and keep the loan, the more interest you will accrue and the more money you will owe
To estimate how much you will owe in the end with a reverse mortgage loan, you can use a reverse mortgage calculator. A reverse mortgage calculator can help you compare different payment options, interest rates, and loan terms, and show you how your loan balance and home equity will change over time.
However, a reverse mortgage calculator is only an estimate and does not account for all the factors that can affect your loan balance and home equity. For example, a reverse mortgage calculator may not include all the fees charged by the lender, or reflect the actual changes in your home value and interest rate.
Therefore, before getting a reverse mortgage loan, you should consult with a HUD-approved reverse mortgage counselor. A reverse mortgage counselor can help you understand the benefits and risks of a reverse mortgage loan, review your financial situation and goals, and explore other alternatives. You can find a reverse mortgage counselor near you by visiting https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome.
Conclusion
A reverse mortgage loan is a type of home loan that allows homeowners 62 and older to borrow against their home equity and receive cash income without making monthly payments. The loan is paid back when the homeowner moves out, sells their home, passes away, or fails to meet certain requirements.
The amount of money you will owe in the end with a reverse mortgage loan depends on several factors, such as the type of loan you choose, the interest rate and fees charged by the lender, the amount of money you borrow and receive, the value of your home and how it changes over time, and how long you live in your home and keep the loan.
To estimate how much you will owe in the end with a reverse mortgage loan, you can use a reverse mortgage calculator. However, a reverse mortgage calculator is only an estimate and does not account for all the factors that can affect your loan balance and home equity. Therefore, before getting a reverse mortgage loan, you should consult with a HUD-approved reverse mortgage counselor.
A reverse mortgage loan can be a useful way to supplement your income in retirement, but it also comes with costs and risks. You should weigh the pros and cons of a reverse mortgage loan carefully and compare it with other alternatives before making a decision.