What A Reverse Mortgage Calculator Won’t Tell You

While a free reverse mortgage calculator might be able to give you an idea of how much you could borrow, none will be able to tell you something that is far more important, and that is how much equity will be left in your home after a period of years. It’s crucial you are aware of this before you make any decision on whether to opt for this type of loan.

There are a number of calculators to be found online. However, you may find that the amounts illustrated differ from one website to another, even when the same dates and amounts are entered. If you are going to opt for either a Fannie Mae or FHA reverse mortgage, then the best (and free) reverse mortgage calculator can be found at either the AARP or National Reverse Mortgage Lenders Association (NRMLA) websites. Both are accurate, display identical figures and display most of the crucial information, such as how much you’d receive as a fixed monthly payment, a line of credit (and how much that line of credit would appreciate over 5 and 10 years for the FHA program) or how much you’d receive as a one-off lump sum.

But, if you opt for a jumbo program, you’ll need to use that company’s proprietary calculator. These calculators also give you the FHA and Fannie amounts though they tend to be slightly less accurate. The Financial Freedom calculator is the most widespread.

A reverse mortgage calculator works by using the equity value of your home, its location, your age (and partners), and current interest rates. It then performs the calculation and gives you an indicative illustration of what you’d receive.

What it won’t tell you is how much equity would be left in your home after a number of years. This is important. How this type of loan works is that the lender agrees to pay you a fixed amount over a period of time – usually as monthly payments. When you no longer live in your home, sell it or die, the loan – in its entirety – must be paid back. This is usually done by selling the home. Any money left after the loan is paid you get to keep.

However, the amount you will receive depends on two things; house prices (how much you could sell your home for in future years) and interest rates.

If house prices fall, you or you heirs would receive less money from the sale of your home or even none at all. Likewise a rise in interest rates would also be detrimental.

No calculator illustrates these two, what-if scenarios. Therefore, when using one, be aware that it will show you what you’ll receive but not the amount of loan that will have to be paid back in say 5, 10 or 15 years from now.

This is why you should speak to your local originator (broker) as soon as possible. Don’t be blinkered by what you get now, but think about what you’ll be left with in years to come. And, don’t say it doesn’t matter because you intend to stay put in your home until you die and you don’t care about your heirs; circumstances change. You must put some thought into this aspect of your reverse mortgage right from the start. It’ll be too late after you take it out and are receiving money.

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One Response to “What A Reverse Mortgage Calculator Won’t Tell You”

  1. John Pecha Says:
    January 23rd, 2008 at 3:54 pm

    An interesting article indeed. But I think a couple additions should be made. Yes the loan must be paid back in full after a maturity event occurs. However, if the loan balance is greater than the home sells for, you will NOT owe the “full” balance of the Reverse Mortgage-only what the home can sell for at that time AND after realtor comissions are paid. The borrower nor their estate or heirs will have to pay the difference. It is important to make that distinction, since it is a valid concern and fear of many potential borrowers.

    There is a calculator that will show you how much equity you could expect over a period of time. It’s not truth, but rather an estimate. It’s an estimate because it makes assumptions about factors such as interest rates, loan advances taken and home market values- all three of which are terribly difficult to predict with accuracy. Instead, the calculator uses the current interest rate, what proceeds you plan on withdrawing and a property apprectiation rate factor that can be adjusted to reflect the market your home is located in. It’s called an amortization schedule and your Reverse Mortgage specialist is required by law to disclose this document to you at application. You can, and should, be able to see this schedule at any point in the consultation process. It is an important document no doubt. It will help provide better understanding of the affects a Reverse Mortgage will have on your property, especially if you want to leave it to your heirs, family, etc.

    The most important part of the Reverse Mortgage process is weighing all of your options. Consider selling and moving. Consider using your retirement accounts and other liquid assets first. Consult a trusted advisor or financial professional to understand the future impact of every option you have. Then, you’ll be making an informed decision that will best fit your situation.

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