Reverse mortgages are not your grandparent’s home financing arrangement. They’re a relatively new mortgage program, specifically designed to give homeowners aged 62 and over access to the equity in their homes without having to make a monthly mortgage payment.
It’s an excellent way for older homeowners to access extra cash without busting their monthly budgets. But there are some downsides to the arrangement, which I’ll cover at the end of this post.
In the meantime, take a look at the calculator below to help you determine how much cash a reverse mortgage will provide for you. That will give you an excellent starting point to begin your research and analysis.
What’s Ahead:
Reverse Mortgage Calculator
How to use the reverse mortgage calculator
The reverse mortgage is designed to help you determine if you qualify for a reverse mortgage, and if so, how much equity you can expect to get from it.
There are only two pieces of information you’ll need to enter:
- Your current home value.
- What is your mortgage outstanding balance?
The calculator will take it from there.
For example, let’s say your current home value is $300,000, and your outstanding mortgage balance is $75,000. Enter that information in the two boxes where they’re requested, then hit “Calculate”.
Once you do, you’ll be provided with two pieces of information:
- Your loan-to-value ratio: 25%.
- How much can you borrow? $165,000.
The calculator assumes your lender will allow you to take a maximum reverse mortgage of 80% of the value of your home.
At $300,000, 80% is $240,000. That’s your maximum reverse mortgage eligibility amount.
But you must deduct your current outstanding mortgage balance from that total. When you do, you’re left with $165,000 in equity ($240,000, minus $75,000).
That will provide you with an estimate of what you can expect to get out of a reverse mortgage. The actual amount is likely to vary. This is because the appraised value of the property the lender will obtain may be different than the value estimate you’ve provided. As well, the actual amount of your current outstanding mortgage balance may be higher or lower than the number you entered into the calculator.
Nonetheless, the amount provided by the calculator will be an excellent starting point for your reverse mortgage search. It will not only help you determine how much you can expect to get from the reverse mortgage – and whether or not it will be worth pursuing – as well as a reasonable amount you can request from your lender.
How we came up with this reverse mortgage calculator
Reverse mortgage amounts can be difficult to estimate because a reverse mortgage itself works in a fundamentally different way from traditional mortgages. One of the complications is what you intend to do with the funds you get from the loan.
For example, with a traditional mortgage, you can do a cash-out refinance for a very specific loan amount. But with a reverse mortgage, you may also want to receive monthly payments in lieu of cash out.
We came up with this reverse mortgage calculator by starting with your maximum eligibility. That’s the loan-to-value ratio of 80%. In the example above, that eligibility came to $240,000. That will be the amount of the new reverse mortgage. However, any current mortgage indebtedness you have on the property will also be paid out of the proceeds of the reverse mortgage.
That will reduce the amount of equity you’ll receive from the reverse mortgage, which was why it’s important to answer the question, how much can you borrow? More specifically, the number you’ll see in the calculator won’t be the actual amount of equity you’ll get from the loan. And even though the total loan amount will be $240,000, the most important question with a reverse mortgage is how much equity you’ll walk away with.
That’s the ultimate number the reverse mortgage calculator works to provide.
Is a reverse mortgage worth it?
The answer to this question depends on your individual circumstances and future plans.
If you’re having difficulty managing your finances, but you don’t want to move out of your home, a reverse mortgage has certain definite benefits.
For example, it can give you access to the equity in your home that can be used in multiple ways. You can take the cash, for example, to pay for medical costs or for debt payoff. But you can also create a line of credit you can access as needed.
It’s also an excellent way of creating additional monthly income. You can set up the equity to be distributed to you in monthly payments.
Still another major advantage is that you won’t have a monthly mortgage payment, at least not as relates to a loan. That’s the exact opposite of a traditional mortgage or even a home equity loan or line of credit. (However, you will still have to pay property taxes, homeowner’s insurance, homeowner’s association dues, and utilities and maintenance on the property.)
You could also consider a HELOC
If you don’t want to go through the whole process of taking out a reverse mortgage, you may want to try a HELOC instead. HELOC stands for home equity line of credit – and operates somewhat similarly to a reverse mortgage, but you get a line of credit only when you need it. That line of credit comes from the equity you have in your home (that’s where it’s similar to a reverse mortgage).
A HELOC essentially operates like a credit card, with the limit being the amount of equity you have in your home.
Figure is an example of a company that offers HELOCs – and they make it much easier than you would think. All it takes is a few minutes to fill out their application process, and you could have your HELOC in a matter of just a few days. And if you have questions (most people do when it comes to their homes), you can get access to live support in under a minute!
The argument against a reverse mortgage
But for all the benefits, a reverse mortgage may not be a perfect situation for you.
They have higher closing costs
First, reverse mortgages typically have higher closing costs than traditional mortgages. In addition to the payoff of any existing indebtedness on your own, those fees will be deducted from the equity you’ll get from the loan.
Reverse mortgages can also involve mortgage insurance. Since they are FHA loans, that will include an upfront mortgage insurance premium as well as annual renewal premiums.
They won’t always make sense for high-cost areas
You should also consider the cost of maintaining your home even without a mortgage payment. In some areas where property taxes and homeowner’s insurance are particularly high, a reverse mortgage may not completely solve a cash flow problem.
Consider how long you’ll live in the house for
Also, consider your future plans. Do you expect to stay in the home for the rest of your life? If so, a reverse mortgage can be a good choice. But if you hope to sell the home and relocate in a few years, it may not be such a good idea.
Even though reverse mortgages generally don’t exceed 80% of the value of your home, the interest on the loan is added to the loan balance each month. As it does, the reverse mortgage increases, eventually decreasing your home equity.
That, in combination with a general decrease in property values in your area – or even with your home in particular – can eliminate that equity. If so, the property may be difficult or impossible to sell.
Summary
If you’re considering a reverse mortgage, be sure to discuss it thoroughly with people you trust, as well as with financial professionals. There are factors to consider, both with the reverse mortgage itself and in your personal situation, before moving forward.
Read more:
- How Do Reverse Mortgages Work?
- Mortgage Underwater? Here Are Your Options
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