I have created a calculator that allows users to get a sense of the principal limit available with a HECM reverse mortgage on their homes using the most popular one-month variable-rate option. A preview of the calculator is shown in Exhibit 1.1. The net principal limit is calculated on seven inputs; the amount of cash flow that could be received as a tenure payment for those seeking this option is also provided. An optional eighth input also allows a term-payment amount to be calculated.
For more information, download our Reverse Mortgage 101 Cheatsheet.
The first input is the Home’s Appraised Value. This value is then compared with the $679,650 FHA lending limit to determine the HECM eligible amount (the eligible amount is the lesser of the two).
The next two inputs are the current 10-year LIBOR Swap Rate and the Lender’s Margin, which together compose the expected rate. The ten-year swap rate is automatically updated, and so it is not necessary for users to change this value—but the calculator provides flexibility to adjust it if desired.
The next input is the Age of Youngest Eligible (Borrower or Non-Borrower) Spouse. The four inputs thus far are used to calculate the Principal Limit Factor.
Next, inputs for Loan Origination Fee and Other Closing Costs are combined with the predetermined cost for the Initial Mortgage Insurance premium to determine the total up-front loan cost.
The next input asks for the Percentage of Up-front Costs to be Financed by the loan. This would be 0 percent if costs are financed from other resources, 100 percent if fully financed by the loan, or any number in between. The final input is the amount of Debt Repayment, Repairs, or Other Life-Expectancy Set-Aside Requirements (LESA) that have been determined as part of the new financial assessments for borrowers. This information about costs and set-asides is then applied to the eligible home value and the PLF to calculate the net available HECM credit with the loan.
Finally, the calculator provides the net amounts available as either tenure or term payments. The tenure payment is calculated assuming a planning horizon of age one hundred and the expected rate plus the ongoing mortgage-insurance premium. The term payment is calculated for a fixed term, though if the desired number of years for the term payment should extend beyond age one hundred, the term payment is automatically adjusted to be the higher value of the tenure payment. Tenure and term payments are both provided as monthly and annual values, and the tenure payment is also represented as a payout rate based on a percentage of the net principal limit plus the financed up-front costs. This payout rate may be helpful as a way to compare with income annuities.
Exhibit 1.1: HECM Calculator—Net Available Line of Credit or Tenure Payment for a Variable-Rate Loan
This is an excerpt from Wade Pfau’s book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement (The Retirement Researcher’s Guide Series), available now on Amazon.