How much will a reverse mortgage pay?
The maximum loan amount, or total equity advance of a reverse mortgage
depends on the factors which are stated below:
- The present and future value of the property
- The greater the value of the property and the more stable the local real
estate market, the more the reverse mortgage will pay. The lender arranges a
professional appraisal to establish the lending value of the property. The
general condition of the property can have an impact on the lending value. This
is the value that the lender believes represents a realistic selling price for
the property even if a quick sale were required. The lender selects annual
property appreciation projections, based on available real estate sales
statistics, to determine the future value of the property.
The length of time the homeowner has owned the home is not
a factor. The property could be bought today and the equity
converted tomorrow if a reverse mortgage could be arranged that quickly.
- The age of the homeowner(s)
- The older the homeowner, the greater the payments. Older is
definitely better with reverse mortgages. Very simply, each property
represents a finite amount of equity. If this equity is released over a
shorter period, it will generate larger individual payments, as there
are fewer to make. Reverse mortgage lenders base their calculations
on life expectancy projections. These statistics project how long
individuals can be expected to live beyond a certain age. That is, the
older the individual, the shorter the life expectancy. Gender plays a
role in life expectancy, as statistics show that women live longer
than men. For example, a 66-year-old woman will live another 18
(to the age of 84) years, a 66-year-old man 14 years (to the age of 80);
a 93-year-old woman will live 31/2 years, a man 3 years.
Older homeowners also benefit in that there is less time for
the interest on the balance to accumulate.
- Lender profit and costs
- Lender profit and various borrowing costs, including interest
charges, will reduce the size of the payments. Reverse mortgages
are not free. A reverse mortgage has the costs of developing and
administering the home equity conversion program built into it,
just as costs are built into all financial products. Legal fees, sales
commissions, and advertising represent a large portion of the
lender's costs. However, lenders who borrow funds to offer as
reverse mortgages incur an additional expense: they have to pay
interest to the investor who provides the funds for the reverse
mortgage. Lender profits derive from the interest differences, or
"spreads." An interest spread is the difference between what the
lender pays to borrow the money for the equity advances, and
what the homeowner pays the lender to use the equity advances.
For example, the lender might borrow at 10 percent and lend at 11
percent; the interest spread of 1 percent means a 1 percent profit
for the lender. Lender profit also derives from the interest spread
between the reverse mortgage interest rate and the interest rate
on the annuity. For instance, if the annuity provided through or by
the lender is 9 percent while the reverse mortgage rate paid by the
borrower is 11 percent, the 2 percent spread is lender profit.
The homeowner's direct borrowing costs include application
cost, appraisal fees, closing costs (legal costs for finalizing the
contract), servicing or administration fees, and interest charges. The
direct costs for the lender mentioned above, including legal fees,
sales commissions, advertising, and interest charges to investors, are
built into the reverse mortgage as indirect costs for the borrower.
- The amount of equity preserved from conversion
- The more equity that is preserved and not converted, the less
equity is available for the reverse mortgage payments. The equity
left at the end of the reverse mortgage is called residual equity.
This amount of equity belongs to the homeowner or to the heirs of
the homeowner's estate.
- The design of the reverse mortgage
- The specific type of reverse mortgage also affects the size of the
payments. For example, the longer the term, or the length of time
the reverse mortgage runs, the lower the payments. Also, in a
combination payment plan, a lump sum payment at the beginning of
a reverse mortgage will reduce the size of the regular installments,
by reducing the equity advance available.
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