Reverse Mortgage Calculator

reverse mortgage

Do you want to project how much equity you will still have in your home in a few years? To help you calculate the balance of your future loans, use our free calculator. This calculator is intended to demonstrate how the outstanding balance of a reverse mortgage can quickly increase over time due to compound interest.

Reverse Mortgages: What Are HECMs And How To Use Them?

You most likely saved money and made retirement plans before you were senior. However, based on your circumstances, you might need more money to sustain yourself as you get older. Even though you have adequate money saved for daily expenses, you must also account for additional medical costs as well as other significant fees. Some folks might want the extra cash to buy a better house that is more suited for elder living. Others may even want an extended vacation to enjoy their golden years.

If you’re close to retirement, it’s a good time to look into reverse mortgages. Our guide will discuss what reverse mortgages are and what they are used for. We’ll focus on Home Equity Conversion Mortgages (HECM), including qualifications for this type of loan and how they work. We’ll also explain the benefits and disadvantages reverse mortgages. By knowing your loan options, we hope to help you make better financial decisions before and during retirement.

What Is A Reverse Mortgage?

Taking a reverse mortgage is a popular financial strategy that helps generate more income during retirement. While people might find it confusing, this is not at all a second mortgage which requires monthly payments. Instead, a reverse mortgage is the opposite of a traditional mortgage: It usually comes in a line of credit paid to you by a lender. The total amount is based on the equity of your home and your life expectancy. It allows you to withdraw a portion of your home equity and convert it into cash. But just like a regular mortgage, it uses your home as collateral.

With a reverse mortgage, borrowers get paid for their home without having to sell and move out of their property. You can withdraw from the credit line as needed, and you don’t have to pay it immediately. Think of it as a bank pre-paying you for your property before you actually move out. You don’t need to make monthly mortgage payments. But of course, you eventually have to pay it back.

You only need to repay the reverse mortgage when:

  • You sell your home.
  • When the home is sold after you die.

Important Note: Be sure to maintain the property, pay real estate taxes, and homeowner’s insurance. Failing to do so means your lender will require you to pay back the loan. If you cannot pay it back, you risk losing your home to foreclosure.

How much money do you get? Home equity is the difference between your home’s appraised market value and the mortgage you have against your property. The longer you pay for your home, the more home equity you build. And the more equity you have on your property, the less you owe on it. Thus, having more home equity means you can qualify for a larger loan. Moreover, older borrowers typically receive more money from reverse mortgages. This is because they’ve gained ample home equity, and they are closer to their life expectancy age.

As of 2023, the maximum claim amount for FHA-backed HECMs is $1,089,300, which is 150% of the FHFA’s national conforming limit of $726,200. The maximum claim amount is also eligible to Freddie Mac’s special exception areas, which are Hawaii, Alaska, Guam, and the U.S. Virgin Islands.

Borrowers use funds from reverse mortgages for various expenses. When you’ve retired, you might need extra income to manage all kinds of costs, such as the following:

Living expenses

Healthcare bills and medicine

Home improvements

Debt consolidation

Assisting your child with college

To buy another home that meets your needs as you age

Are reverse mortgage payouts taxed? According to the IRS, distributions from reverse mortgages are not taxable. These are regarded as loan advances to borrowers instead of regular income. Though you may take it as a regular monthly payment, lump sum, or line of credit, it’s considered a loan which is eventually paid back. Proceeds used to pay a reverse mortgage come from the home sale when you move or when the home is sold after your death.

What Is An HECM Reverse Mortgage?

The most common reverse mortgage taken by consumers is a Home Equity Conversion Mortgage (HECM). It’s a type of home loan exclusively provided for homeowners aged 62 years old and above. HECMs are federally insured reverse mortgages that are backed by the U.S. Department of Housing and Urban Development (HUD). The payments you receive from this reverse mortgage can be used for any purpose.

To be eligible for an HECM, you must satisfy the following requirements:

62 years old or older

You and/or an eligible spouse occupies the home as a primary residence

Owns the home or has paid a significant amount on the property

Is not delinquent on any federal debt

Has participated in a mandatory consumer information session conducted by an HUD-approved HECM counselor

Has enough financial resources to continue making timely payments on housing expenses (property taxes, mortgage insurance, maintenance etc.)

Besides borrower requirements, your house must meet all FHA property standards:

A single-family home or a two to four unit home, with one unit occupied by the borrower

Can be a manufactured home that meets FHA standards

For condos, must be an HUD-approved condominium project

For individual condo units, it must meet FHA-approved single-unit requirements

Old couple with piggybank savings.

Reverse Mortgage Payment Options

When it comes to HECM reverse mortgage payouts, borrowers can choose from several options. Depending on your preference and what’s more convenient, you can take it as a one-time lump sum fund, periodic monthly payments, or as a line of credit.

Single Disbursement

The simplest payment option is to take a lump sum amount all at once. A single disbursement gives you access to all available loan proceeds upon closing. It comes with a fixed interest rate, where your loan balance grows over time as it accrues more interest. This is the least expensive payment option because your interest rate is fixed, and you take out a definite loan amount. However, the amount you can access is usually smaller with a fixed-rate than an adjustable-rate option. Borrowers typically choose this option to purchase a new home that’s more suitable as you age.

You can use the money for the HECM for Purchase program, allowing you to sell the house outright and use funds from the sale with other income sources combined with the reverse mortgage proceeds. This homebuying process can leave you with no monthly mortgage payments.


Line Of Credit

Most borrowers take their reverse mortgage as a line of credit. Though it comes with an adjustable interest rate, it lets you withdraw funds only and when you need them. It also has a distinct feature: the unused portion of the credit grows over time. This growth feature takes into account how you age each year and how your home appreciates in value. Another advantage is you only pay interest on the money you borrowed. The HECM credit line is guaranteed for a lifetime and allows you to pay the balance at any time without penalty.

Regular Periodic Payments

You can opt for fixed monthly payments which comes with adjustable interest rates. If you choose a tenure payment, you’ll receive monthly payouts for the rest of your life, as long as you continue to live in your house. Even if the loan balance exceeds the value of the home, the borrower will still receive the same monthly payment. The payments only stop if the borrower moves or passes away.

On the other hand, if you take term payments, you’ll only receive monthly payouts for a limited period of time, such as 10 years. In some cases, to receive the maximum payout benefit, a borrower might want to defer going into Social Security until the age of 70. If this borrower is 65 years old, they can set term payments for five years. The monthly payment remains the same every month even if the home’s value decreases.

Modified Combination Payments

Borrowers also have the choice to take a combination of payment options. For instance, you might take a lump sum amount upfront, then keep a credit line afterwards. If you take a modified tenure with a line credit, you’ll have an established credit line while receiving fixed monthly payments for as long as you occupy the residence. On the other hand, if you choose a modified term with a line of credit, you’ll have an established credit line while obtaining fixed monthly payments for a set amount of time.

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About the Author: Penulis Kreatif adalah Blog Seputar Peluang Bisnis Kreatif di Indonesia dan Dunia. Akan mengulas berbagai peluang bisnis secara kreatif dan mudah dipahami oleh pembaca

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