Reverse Mortgage Calculator
I created a calculator which allows users to get an idea of the principal limit available with a HECM reverse mortgage on their homes using the most popular one month variable rate option. An overview of the calculator is shown in Exhibit 1.1. The net principlethe pal limit is calculated on seven entries; the amount of cash flow that could be received as a permanence payment for those seeking this option is also provided. An optional eighth entry also allows a term payment amount to be calculated.
For more information, download our Reverse Mortgage 101 Cheatsheet.
The first entry is the appraised value of the house. This value is then compared to the FHA loan limit of $726,525 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 make up the expected rate. The ten-year swap rate is automatically updated, so there is no need for users to change this value, but the calculator provides the option to adjust it if needed.
The next entry is the age of the youngest eligible spouse (borrower or non-borrower). The four inputs so far are used to calculate the main limit factor.
Then the entries for Loan origination fees and other closing costs are combined with the pre-determined cost of the initial mortgage insurance premium to determine the total initial cost of the loan.
The next entry asks for the percentage of initial costs to be financed by the loan. This would be 0% if the costs are financed by other resources, 100% if they are financed entirely by the loan, or any number in between. The final entry is the amount of debt repayment, repairs, or other life expectancy set aside requirements (LESAs) that were determined as part of the new borrower financial assessments. This cost and layaway information is then applied to the home’s eligible value and PLF to calculate the net HECM credit available with the loan.
Finally, the calculator provides the net amounts available in the form of permanence or term payments. The occupancy payment is calculated assuming a one hundred year planning horizon and the forecast rate plus the current mortgage insurance premium. The term payment is calculated for a fixed term, but if the desired number of years for the term payment should extend beyond one hundred years, the term payment is automatically adjusted to be the highest value of the term. tenure payment. Both tenure and term payments are provided as monthly and annual values, and the tenure payment is also represented as a payment rate based on a percentage of the net principal limit plus the initial costs financed. This payout rate can be useful as a means of comparison with income annuities.
Exhibit 1.1: HECM Calculator—Net Available Line of Credit or Occupancy Payment for a Floating 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.