Understanding an Online Reverse Mortgage Calculator.
There are generally two styles of online calculators. One has a brief summary of the benefit amounts using three or more different types of reverse mortgages. The other is more detailed showing interest rates and fees in addition to the basic benefits. I've shown both side-by-side below. Don't be concerned if they are too small to see the details, I'll post both farther down and in more detail.
The one on the left is the summary style as taken from the Wells Fargo site on 3/26/09. The one on the right is the detail style as taken from this site on 3/26/09.
The Summary Style Online Reverse Mortgage Calculator
Let's look first at the summary style since this is the most common. At the top, under Your Information, they have merely recapped the information you entered in their initial fill in section as shown by the full readable chart below.
The next section lists in columns the different types of reverse mortgages that will be displayed in the quote. Since the summary and the detailed version show the two different ways these might be shown in either type of reverse mortgage calculator, I will cover them at the same time.
The summary version, shown first, has four different reverse mortgage choices shown. They all start with the letters HECM. This stands for Home Equity Conversion Mortgage. This is the FHA version of a reverse mortgage and historically has accounted for about 90 percent or more of all reverse mortgages. This also tells me no other versions of a reverse mortgage are being offered.
- In the first column, it says HECM Monthly CMT. That means this is the FHA version of the reverse mortgage that adjusts monthly based on a one year Constant Maturity Treasury (CMT). That has, by far, been the most frequently used version.
- In the second column, it says HECM Fixed. This is relatively new. This is a fixed rate version of the FHA reverse mortgage.
- In the third column, it says HECM Monthly LIBOR. This also is relatively new. This is the FHA version that adjusts monthly based on LIBOR (London Inter-Bank Offer Rate). You can just see that the LIBOR version has $366,000 available vs. the $355,000 of the CMT. So, on this date, the LIBOR version offers more than the CMT version.
- In the fourth column, it says HECM Annual. This means this is the FHA version but the interest rate adjusts yearly instead of monthly. Since the borrower and bank share interest rate risk on the monthly adjustable, the lender is taking on additional risk if the interest rate only adjusts annually. For that added risk to the lender, the borrower pays a higher margin which results in a higher interest rate to begin with. (If interest rates jump up, the borrower may be paying lower interest rates until the year is up and they adjust again. If rates go down or stay about the same, the borrower will actually be paying more than they would have.) Also notice the amount of money is less than either of the other two adjustable rate loans. This is because the interest rate is one of the ingredients (along with age and home value used) to determine the benefit amount from the reverse mortgage.
See my Interest Rate page for a discussion of both adjustable and fixed rate reverse mortgages.
Below is the same section of the detailed reverse mortgage calculator. You can see that all three are HECMs. The extra number in there is the margin. Remember, index plus margin equals the interest rate you are charged.
- So when you see HECM 300 CMT, you can now determine this is the FHA version of a monthly adjustable using the Constant Maturity Treasury with a margin of 3.00%.
- The next one is using a margin of 2.75% based on LIBOR rates. You can't automatically tell if the rate is higher or lower from just seeing this. The LIBOR index may be higher (or lower) than the CMT index so it doesn't mean much unless you are comparing to other LIBOR margins you may be seeing.
- And the last is a fixed rate FHA version. Since the rate does not adjust, it does not use an index and margin so there is no margin shown in the name.
Below is just a portion of the summary calculator so I can describe each of the lines. As you have learned now, this is the FHA version of the monthly adjustable that uses the Treasury (CMT) index.
Most summary reverse mortgage calculators will display your benefit after fees and set-asides. So, if you see just one number listed, it is likely the net after fees. In this case they display the Initial Principal Limit of $355,000 and then the Funds Available to You. I can determine they have subtracted the fees, set-asides and the $100,000 existing mortgage I said you owed. This would then be net of all fees and liens. It is unusual for summary calculators to show the gross amount before fees so watch the words used. Notice the words have hyperlinks. Click on those to make sure you understand what is being quoted.
In a reverse mortgage, you have a choice of a lump sum OR a Line of Credit OR monthly payments OR a pro-rated combination of two or more choices. So in the example above, you have the choice of $228,404 in a Lump Sum OR $228,404 in a Line of Credit OR $1,499 in monthly payments for the rest of all borrower's lifetime.
In the section titled Or a Credit Line Account it shows an Annual Growth Rate of 4.14%. They then give an estimate of what the line of credit will total at the end of five years and at the end of ten years. See my page that includes a description of the Line of Credit.
The Detailed Online Reverse Mortgage Calculator
Here is one of the margin choices we will look at in detail - the FHA version with a 3.0% margin based on the one year Treasury.
Let's focus on the top section. This recaps the home value and age of the youngest borrower (some calculators may show both ages if there are two) we input into the initial section of the calculator. The home value (adjusted) is using the lesser of the home value or the FHA maximum limit. In this case the home value is $500,000 which is less than the $625,500 limit in place at this time. If the home value had been $750,000, then the adjusted value would have been the lesser amount of $625,500.
The initial interest rate at 3.68% is the interest you would be charged this month if your reverse mortgage were already in place. Remember, the rate on an adjustable rate mortgage is the index plus the margin. Since this calculator shows the name as HECM 300 CMT, we have learned this choice is using a margin of 3.00%. With a little subtraction, we can calculate that the index must be 0.68%.
Reverse Mortgages have a monthly service fee. We can see this one is $30. In a regular mortgage, there is no service fee. That is because the interest rate has been 'smidged up' to allow monies to be generated for servicing. When the lender sells the loan to an investor (Fannie Mae, Freddie Mac, etc.) they receive money back to service the loan. FHA doesn't like the idea of lenders having any 'smidge' factor - they want all the number to be transparent to the borrower - so that system isn't allowed. They understand the lender needs money to service the loan (mailing of monthly statements, mailing checks, depositing monthly payments, answering questions and such) so they allow lenders to charge up to $35/month. It shows up on the statement. So you can see this lender is charging a little less than the maximum allowed. $30 is a fairly typical number. I see $35 occasionally. I rarely see $25 or less.
This is the middle section and includes fees and set-asides. It starts with the principle limit. I call this your benefit. It is the gross amount of how much money you get based on three factors: The value of the home or FHA limit (whichever is less), the age of the youngest borrower, and the current interest rate. In this case, that is $355,000.
A subtraction from that amount is made for a servicing fee set-aside. Remember, this reverse mortgage has a monthly fee of $30. This is subtracting from the amount available to, as I say, make sure the lender can get their fee before you spend it. It is not an up front fee like the others. It is subtracted from how much you can use but not added to how much you owe. It is only added to how much you owe $30 each month.
The Available Principle Limit is just a sub-total of the Principle Limit minus the Set Aside.
Next are three fee. The first is the FHA Mortgage Insurance Premium which is frequently abbreviated as MIP. This is two percent of the loan amount. The loan amount on a reverse mortgage is different that a regular mortgage. On a regular mortgage, the loan amount is how much money you get. On a reverse mortgage, no body really knows how much that will be over time. Remember, the loan balance will be growing because you are making no payments and the interest is added each month to the balance. Also, the Line of Credit grows so you may have much more money to use in the future. So, by definition or by convention, the loan amount in a reverse mortgage is defined as the Home Value or FHA limit, whichever is less. This is the same amount used to calculate 'your benefit'.
In this case, 2% of $500,000 is $10,000. That money goes straight to FHA. It is insurance and is specific to reverse mortgages. It is significantly different than MIP on regular FHA mortgages and PMI on regular mortgages. This insurance is there for two specific reasons. The first insures that if the loan amount is less than the value of the home when the loan becomes due (borrowers sell, move or pass away), then they or their heirs owe no more than the value of the home. There is an exception to this if the heirs wish to keep the home rather than selling it. The MIP also insures that if anything happens to the lender, FHA will step in and make sure the borrower continues to have access to their monthly payments or Line of Credit.
This is BIG. Having $10,000 go to fees and the beginning balance on our mortgage may be hard to take but it is a huge value. While all reverse mortgages provide that the borrower or heirs will owe no more the the value of the home when the loan comes due, this MIP makes a big difference in how the initial benefit is calculated. When there are jumbo or proprietary reverse mortgages available, their loan to value (LTV) is much less than the FHA version. The proprietary lenders do not have MIP. That is an initial savings up front and makes the loan look less costly. But it also means the lenders have do not have a fall back position if the home does become valued less than the amount of the mortgage when the loan comes due (borrower sells, moves, or passes away). So to compensate for that, proprietary lenders offer a lower LTV than the FHA. I'm going to make up some numbers just as an example. In the current example, the FHA version has $355,000 available in the Principle Limit. For the same $500,000 home value, the proprietary lender may only have $200,000 available. For any home value less than the FHA limit, proprietary lenders will always have less than FHA. They begin to provide more money at higher valued homes. If I use the same ratios as my example, a $1,000,000 home would have $400,000 available from the proprietary lender. At $2,000,000, $800,000 would be available. That is why they are frequently referred to as jumbo loans. They usually only come into play if the home value is higher than the FHA limit.
The MIP also insures that if something happens to the lender, FHA steps in to make sure you continue to have access to your LOC or monthly payments. This, too is BIG. You are counting on those funds to likely be there for the rest of your life. You are making plans for those funds. Proprietary lends can't guarantee this. If they go out of business, there is some uncertainty. There is nothing like having the U.S. Government stand behind your loan (no matter how many jokes we might have heard.)
Same as above, just repeated to help you avoid
scrolling.
The next fee is the loan origination fee. This goes to the lender. Believe it or not, this is an important fee. These funds go in a number of different directions such as advertising and paying for the infra-structure of originating and processing loans (software, offices, originator, processor, underwriter, documents, funder, closer, packaging to the investor and many other pieces of running a mortgage company). If the lender is efficient and sometimes a little lucky, they may actually make a profit on all this. If not, they may have to get out of the reverse mortgage business or out of business all together.
The origination fee had been higher than most mortgages. This was largely because there were not many reverse mortgage companies, costs of doing reverse mortgages was higher because there was no efficiency in volume and because a lot of time and dollars went into education the public. Because of the higher fees, more competitors came into the business, more money was spent in advertising (maybe that is how you heard of reverse mortgages - seeing James Garner or Robert Wagner suggest on TV that you might wish to learn more about them) and with more customers came more competitors.
In 2008, Congress capped the origination fee at $6,000. Like the MIP, it had been 2% of the loan amount. Prior to the cap being instituted, the maximum FHA loan amount of $362,790 resulted in a maximum origination fee of $7,255.80. Now with the maximum FHA limit at $625,500, the $6,000 cap is less than 1%. There is a formula that still starts at 2% for lower loan amounts and is then reduced until the cap is reached. I won't bore you with the details. The detailed calculator will display it to you.
The third set of fees is usually shown as Other Fees or similar. This is what I call third party fees. Typical of when you are buying a home and some third party is performing a service as part of the process. This typically includes the appraiser, title company, escrow company, real estate lawyer in some states, notary, recording fees and such. It may also include inspections such as pest, septic, well, roof and such although we aren't seeing that as often as we did a few years ago prior to FHA reducing some of the requirements.
Next, the calculator does another subtotal after fees. These three sets of fees will be the beginning balance on your reverse mortgage even if you take no money up front.
Finally, in this section, any liens against the property are subtracted from your benefit.
The bottom section starts with the Net Available Principal Limit. This is the amount you get after all fees, set-asides and lien payoffs.
You may take some cash up front to pay off auto loans, credit cards or have some other plan for it.
Any funds you don't take up front or in the form of a monthly payment to you will go into a line of credit. Unlike regular mortgages, equity loans or equity lines of credit, where you can choose the dollar amount subject to qualifying, the reverse mortgage always provides the maximum benefit to you whether you want it or not. The part you don't need now is put into a line of credit that you could use later when you may need it more without having to refinance and go through the whole process again.
Next, the calculator shows the Credit Line Growth Rate. The line of credit grows at the same rate as we charge you for the money you borrow. If you were to look above, you would see the interest rate is quoted as 3.68%. You are also being charged an ongoing 0.5% for continued MIP to the FHA. This totals 4.18%, the same as noted below.
The last item noted is Available Tenure Income. If instead of taking any money up front or put into the line of credit, this is the maximum amount you could take on a monthly basis and have it last for the lifetimes of all borrowers. It doesn't matter how long you live, this amount of money could keep coming in. This is so, even if it exceeds, over time, the Principle Limit (your benefit). If you needed more, say for in-home care, you could receive it. It would then be called term income and it would run out at some point. By the way, the term 'income' used here is sometimes misunderstood. It isn't like working and getting a W-2 or investing and getting a 1099. You are borrowing money. If you take a cash advance from a credit card, you don't usually call it income. Because the money can come to you on a regular monthly basis, many people including originators, websites and reverse mortgage calculators may refer to this as income. I've tried to refer to it as payments to you to avoid the inference that it is taxable income which it is not.
Note: Interest rates and margins can be volatile. The numbers in this example were from Thursday, 3/26/09. On 3/30/09, margins were increased. In the detailed version, you can see the HECM CMT was at 3.00% and the LIBOR was at 2.75%. Just two days earlier, on Tuesday, 3/24/09, the margins were 2.75% and 2.25% respectively. By Monday, 3/30/09, the margins were 3.50% and 3.00% respectively. This was an increase of .75% in less than a week. For this example 75 year old borrower, it subtracted about $10,000 from Tuesday to Thursday and another $22,000 from Thursday to Monday for a total of about $32,000 less in benefits. I've had people tell me they were going to wait until they were another year older or more so there would be more money. In this example, a 76 year old would have received about $5,000 more. But from Tuesday to Monday would have lost about $32,000 from that higher number. Interest rates (and home values) provide much bigger swings in the amount available in a reverse mortgage than age.