The maximum amount of money you can receive via a reverse mortgage is some fraction of your home’s worth. Depending on interest rates a 62-year old might get between 13% and 52% of the home’s value, minus closing costs. An 80-year old might get between 27% and 66%, again minus closing costs.
Because of the closing costs, early repayment of a reverse mortgage is quite punitive in terms of the annualized cost of funds. As time passes and the amount owed grows, repayment becomes less and less likely.
Barring a windfall such as a lottery win or a substantial inheritance, there is a great likelihood that the money received through the reverse mortgage will be the only compensation you ever get for your home.
For instance, assume you are 65, have a $300,000 home, and are considering your reverse mortgage options. Using H.U.D. (the U.S. Department of Housing and Urban Development) guidelines and industry norms, assuming 5% interest with a tenure loan you could get monthly payments of $912 for life. You could instead get a higher amount for a specified term, such as $1,135 per month for 20 years given the stated assumptions. Or you could get an immediate lump sum, which would be limited to $97,560 during the first year. You could borrow up to $149,348 net of closing costs if the amount over $97,560 was used to pay down an existing mortgage, improve your dwelling, or not taken until after the 12th month.
In all cases, the reverse mortgage balance quickly grows to an amount that exceeds the $300,000 value of the home. If a lump sum amounting to $149,348 was received, the home equity would be gone early in year 10. If the lower lump sum of $97,560 was taken, your equity would be wiped out toward the end of year 16. In the case of the tenure option, your home equity would be eliminated at the start of the year 16, at which point you will have received a cumulative total of about $174,000. With the term option your equity would be gone toward the beginning of year 14 after receipt of about $180,000.
Whether your home was sold by you or handled by your estate, once enough time passes no one in your family will get another penny for your home beyond the reverse mortgage cash advances.
H.U.D. is quite clear about how much you are being short-changed when you dump your home via a reverse mortgage. The department provides tables displaying the maximum percentage of your home’s market value which you can receive in present value terms. For instance, at 5% interest, a 62-year old could qualify for, at most, a loan worth 52.4% of the home value. The amount actually available is reduced by closing costs. As a result, a 62-year old might only receive 47% or so of the home’s value. At 6% interest, a 62-year old would receive less than 40% of the value. At 7% interest, about 30% of the home’s value would be available – at most!
Further reducing your proceeds, a lender can demand ‘set-asides’. Briefly put, if there is doubt as to your ability to keep up with property taxes, maintenance, or insurance, a lender can ‘set aside’ funds that will assure funding of these items. These funds are subtracted from the amount you are allowed to receive.
It does not matter if contracts throw in words like points, fees, interest, insurance, and all the other items one finds in a mortgage. If you have no equity in a home and received a certain amount of money in exchange for that equity, you effectively sold your home for that cash. Per factors legally set by H.U.D., through a reverse mortgage you dump your home for a pittance!
Get the whole picture. Read The Final Rip-Off: Reverse Mortgages available at Amazon and Barnes & Noble.