The following example is based on a single individual who is 75 years old. The borrower owns a home that is valued at $380,000 and resides in Connecticut. The table that is provided below displays the maximum line of credit without including any monthly income. The chart also displays the presence of a monthly income with no credit line. These numbers represent what could be available following all mortgage payments and the paying of any liens that are against the home. There is no inclusion of home repairs that may be needed.

The programs that are mentioned will allow the homeowner to distribute money between a monthly income and a credit line (i.e account for cash). Fannie Mae offers the Home Keeper Mortgage and the Home Equity Conversion Mortgage, or HECM is insured federally.

The Borrower Could Receive	Monthly Adjusting HECM	Annual Adjusting HECM	Fannie Mae Home Keeper
1. Lump sum advance of	$212,548	$176,161	$155,758
2. Credit line that will increase annually	$212,547	$176,161	$155,758
The credit line will increase by	7.14%*	8.94%*	0%
When unused, the available credit in 5 years	$302,815	$271,735	$155,758
Available credit in 10 years	$431,417	$419,163	$155,758
3. Monthly loan advance for the time the client resides in the home	$1,520	$1,437	$1,355
Combination of any mentioned options1	–	–	–

^* – The growth rate of the credit line is based on current interest rates. The actual growth will vary with any changes to the rates.

¹ – the borrowing options which can be combined or mixed are: lump sum when the mortgage is closed, line of credit and a monthly loan advance.

Summary of Reverse Mortgage Projection Calculations

The following chart displays how estimates for HECM and HomeKeeper reverse mortgage programs are projected.

In the below example, the loan rate will equal the current rate index of a 1-Year Treasury. This is in addition to a lender’s margin. Currently, that margin is 1.4% for all monthly-adjusting HECMs. There is also 0.5% for the insurance on the mortgage. The Growth Rate in the credit line from HECM will remain equal to the total periodic rate that is being charged on the balance of the loan. The growth rate will also reflect the monthly compounding of interest.

Loan Calculations	Monthly Adjusting HECM	Annual Adjusting HECM	Fannie Mae Home Keeper
Current rate lending index	3.9%	3.9%	4.1%
Profit Margin of Lender	1.4%	3.0%	3.42%
Current Loan Interest rate	4.5%	6.1%	6.6%
Mortgage Insurance	0.50%	0.50%	—
Current Effective Int. Rate	5%	6.7%	6.750%
Growth Rate in Credit Line	7.34%	9.06%	0%
Cap on Effective Loan Rate	15.10%	11.70%	18.75%
Home Assessment	$380,000	$380,000	$380,000
Lending Boundary	$344,651	$344,651	$396,150
Lesser of Boundary or Home Assessment	$344,651	$344,651	$380,000
Loan Principal Limit	$234,707	$197,829	$170,624
Minus Loan Fees to Lender	$6,893	$6,893	$7,600
Minus Mortgage Insurances	$6,893	$6,893	$0
Minus Other Closing Exp	$4,389	$4,389	$3,989
Minus Service Fee	$3,984	$3,494	$3,276
Cash Available	$222,048	$176,161	$155,758
Minus Liens on Home	$0	$0	$0
Minus Needed Repairs	$0	$0	$0
Minus Other Cash	$0	$0	$0
Minus Desired Credit Line	$0	$0	$0
Total Left for Monthly advance	$222,048	$176,161	$155,758
Monthly advance	$1,520	$1,437	$1,355
Credit Line in 5 years	$0	$0	$0
Credit Line in 10 years	$0	$0	$0

All of the above projections are based on interest rates from HECM and servicing fees at the time of the analysis and closing costs are predicated on the national average. The exact loan proceeds will be contingent on the rates that are current at the time the loan is executed. The proceeds will also be contingent on what the home has been appraised at and what equity limits are in place. All rates are subject to change throughout the year.

Click here (reverse mortgage tax-free income) to see how much tax free income you could potentially get with your house.

It is very common for any individual over the age of 62 to be approached and presented with the option for a reverse mortgage. This is why it is so important for people to have an understanding regarding how these mortgages work and how they could benefit an individual as well as children in the family.

What is a Reverse Mortgage?

A reverse mortgage is a unique kind of loan that is available to those who are over the age of 62. If this is involving a married couple, the youngest spouse is required to be 62. The couple or individual must be the homeowner. An irrevocable trust cannot usually hold title to qualify; although some banks are now allowing it. When a reverse mortgage is obtained, part of the equity in the home will be exchange for liquid cash. One of the benefits with using a reverse mortgage is that individuals have no need to meet any requirements in regards to assets, income, or credit. The reverse mortgage is a non-recourse loan which means that they the lender only has recourse on the home, not on personal assets.

There are some factors that will impact how much money can be received. These factors include:

1. The actual assessment of the residence
2. The age of the youngest spouse that will be borrowing
3. Interest rates at the time of the funding.

When money is borrowed with a reverse mortgage, it can be received in various forms, such as in its entirety, in monthly installments or a mix of these conditions. The borrower will not have any liabilities because this is a non-recourse loan. In addition, the borrower will not be required to make any amount of mortgage payment. However, the interest and any other applicable fees will grow.

Why do people use Reverse Mortgages?

Homeowners are often pitched the idea of a reverse mortgage by financial advisors who really have little knowledge of these loans and they also don’t care much if the borrower can really benefit from this retirement planning method. Older people may also be influenced by ads on television with celebrities claiming that a reverse mortgage is a great idea for them.

Upon entering retirement and within the years that follow, many elderly people will experience financial problems. Perhaps an unexpected illness happened to them or their spouse, or their pension plans are not providing them with enough money, or simply the cost of living has spiked. No matter what the reason for the financial distress, most of these clients do own a home. However, through a reverse mortgage, being a homeowner will provide needed cash flow to pay for unexpected expenses and everyday living costs – anything you want.

In these situations, the homeowners are often approached and told that they have the ability to obtain cash by entering into a reverse mortgage. This is made even more attractive when the client is told that they will not have to make monthly payments on the amount of the loan.

Some may see this as being a way to get money without any consequences, but this is a myth and a misconception. The interest rates on these loans tend to be higher than a traditional loan because of the fact that no mortgage payments are being made. In addition, the interest continues to compound as with any negatively amortizing loan. In turn, this will increasingly accelerate the equity that is actually being removed from the home. In other words, the borrower of a reverse mortgage is losing his/her ownership in the home and the loss increases more quickly with the duration of the loan. However, if the equity disappears faster than the bank that made the loan expected, it is really their problem, not yours.

There are definitely some instances where a reverse mortgage can be a great idea.

3 Reasons Why a Reverse Mortgage May be Suitable?

There would be three situations in which a reverse mortgage could be the right choice.

1. Reverse mortgages can be beneficial when an individual is in dire need of funds to keep up with bills. Some seniors may face the possibility of being transferred from their home when they are having financial problems because they have limited other assets, so a reverse mortgage can prevent this and provide the borrower with the funds they need at the time they are needed.
   It is not an uncommon event for seniors to struggle financially and not be able to get money to pay their bills. For the majority of these individuals, their home is their sole asset. Looking at it from one standpoint, it may be more beneficial to sell a large home and move into something smaller, taking the cash from the sale to pay bills. However, a drastic life change such as this could potentially have profound mental and emotional consequences for most seniors.
2. Some seniors will be relieved of physical or mental issues if they obtain money. The borrower may not actually need the funds, but they want it and having the money could prevent further physical and mental health difficulties.
   This is often the case for persons who feel they came into this world having no assets and feel they should leave the same way. The borrower is clear of the consequences that a reverse mortgage will include compounding interest and the result is that less money will be left to beneficiaries upon death.
3. Reverse mortgages can be beneficial if a person has a negative situation with estate taxes and they wish to find a means of passing the maximum amount to their beneficiaries.
   In a case like this, there would be a 50% federal estate tax in 2013 and beyond after the $1 million exemption that would be levied on the home should the senior remain living in the residence until their death. At this point, the home would be sold and the amount of money remaining would be inherited by the heirs. One method of reducing estate taxes is to take a reverse mortgage and use the money as a gift to an ILIT, Irrevocable Trust for Life Insurance. With this money, it is then possible to purchase a life insurance policy that would eventually not be taxed and could be passed to the beneficiaries and paying not estate tax.

A reverse mortgage can be a valuable retirement strategy for some elderly couples and individuals, but it is important to know all about how a reverse mortgage works before making any decisions. Speaking with a qualified and knowledgeable advisor will be beneficial. In general, they do not make financial sense and there are usually better financial options. To get more information on an example of a reverse mortgage calculation.

Call Estate Street Partners to find out more information if the reverse mortgage is suitable for you. (888) 983-5872.