Calculating Reverse Mortgages
I have created a calculator that allows users to get a sense of the principal limit available with an HECM reverse mortgage on their home using the most popular one-month variable rate option. The calculator asks for eight boxed inputs, and uses these inputs to calculate the net principal limit. It also provides the amount of income that could be received as a tenure payment for those seeking this option. An optional ninth input also allows for a term payment amount to be calculated. I will describe tenure and term payments in detail later, but the calculator provides sufficient definitions for now.
The first input is the Home’s Appraised Value. This value is then compared with the $625,500 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 (automatically updated) and the Lender’s Margin, which together comprise the expected rate. The next input is the Age of Youngest Eligible Spouse (or non-borrowing spouse). The four inputs thus far are used to calculate the Principal Limit Factor (PLF). 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 upfront loan cost.
The seventh input asks for the Percentage of Upfront Costs to be Financed by the loan. This would be 0% if costs are financed from other resources, 100% if fully financed by the loan, or any number in between. The final input is the amount of 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 100 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 100, 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 upfront costs.