In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries (including the United States), a reverse mortgage must be the only mortgage on the property.
Requirements
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds.
Factors responsible
The amount of money available to the consumer is determined by five primary factors:
- The appraised value of the property
- The interest rate
- The age of the senior (The older the senior is, the more money he/she will receive).
- Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest. Monthly payments are set up as a "Tenure" payment. Borrowers receive them for the rest of their lives no matter how long they live.
- The value of the property
In this appendix the algebraic formulas necessary to calculate payments to borrowers are given.
1.Principal Limit:
PL{Sub k} = PL{Sub 1} (1 + i) {Sup (k-1)}
where
PL{Sub k} is the principal limit in the kth month of the loan, and this principal limit is constant during the entire month,
PL{Sub 1} is the principal limit at origination and is obtained by multiplying the principal limit factor provided by the Secretary by the maximum claim amount.
I is the monthly compounding rate calculated as one twelfth of the sum of the expected average mortgage rate and the annual MIP (Mortgage Insurance Premium) rate (0.5 percent).
For example, if the expected average mortgage rate is 10 percent, then
i = (0.10 + 0.005)/12 = 0.00875. The compounding rate does not change during the life of the loan.
5-5PRINCIPAL LIMIT.
The payments that the borrower can receive from a reverse mortgage are determined by calculating the principal limit.
A.The principal limit is the present value of the loan proceeds
available to the borrower. It is determined at closing and
increases each month by one-twelfth of the sum of the expected
average mortgage interest rate ("expected rate") plus the monthly
MIP rate.
2.Servicing Fee Set Aside:
available to the borrower. It is determined at closing and
increases each month by one-twelfth of the sum of the expected
average mortgage interest rate ("expected rate") plus the monthly
MIP rate.
2.Servicing Fee Set Aside:
S{Sub k} = FEE x [(1+i){Sup(m+1)} - (1+i)] / [i x (1+i){Sup m}],
where
S{Sub k} is the set aside of principal limit required in the kth month of the loan for future payment of flat monthly loan servicing fees from the borrower's account, and this amount
is constant for the entire month,
m is the number of remaining months that the servicing fee could be collected, i.e., the remaining term on a tenure mortgage in the kth month of the loan:
m = 12 x (100 - Borrower's Initial Age) - k + 1, and
FEE is the monthly loan servicing fee charged to the borrower's
account.
where
S{Sub k} is the set aside of principal limit required in the kth month of the loan for future payment of flat monthly loan servicing fees from the borrower's account, and this amount
is constant for the entire month,
m is the number of remaining months that the servicing fee could be collected, i.e., the remaining term on a tenure mortgage in the kth month of the loan:
m = 12 x (100 - Borrower's Initial Age) - k + 1, and
FEE is the monthly loan servicing fee charged to the borrower's
account.
NOTE: If loan servicing charges are included in the interest rate and thereby paid as a percentage of the outstanding loan balance, then FEE is zero, and the calculation of S{Sub k} results in a zero set aside amount for all months. In all other cases, the servicing set
aside, S{Sub k}, decreases as k increases, reaching zero for
k = 12x(100-Age).
3.Net Principal Limit:
aside, S{Sub k}, decreases as k increases, reaching zero for
k = 12x(100-Age).
3.Net Principal Limit:
NPL{Sub k} = max [ 0, PL{Sub k} - S{Sub k} - B{Sub k} ],
where
NPL{Sub k} is the net principal limit in the kth month of the loan,
PL{Sub k} is the principal limit in the kth month from equation (1),
S{Sub k} is the servicing set aside of principal limit from equation (2), and
B{Sub k} is the total loan balance in the kth month, including
payments to or on behalf of the borrower (whether scheduled
or unscheduled), interest at the note rate, and MIP. NOTE:
B is subject to per diem interest and MIP for mid-month
calculation. At origination, i.e., k = 1, the balance is
the initial loan balance.
4.Principal Limit for Line of Credit:
LOC{Sub k} = LOC{Sub 1} (1 + i){Sup (k-1)},
where
LOC{Sub k} is the principal limit for the line of credit in the kth
month of the loan, and this principal limit is constant for
the entire month (no per diem compounding for mid-month
calculations), and
LOC{Sub 1} is the principal limit established for the line of credit
at origination, and must not exceed NPL {Sub 1} from
equation (3). (NOTE: LOC{Sub 1} must be large enough to
cover required set asides for repairs after closing and
first year taxes and insurance, if any.)
5.Available Line of Credit:
ALC{Sub k} = max [ 0, LOC{Sub k} - D{Sub k} - R - T ],
where
ALC{Sub k} is the available line of credit in the kth month of the loan,
LOC{Sub k} is the principal limit of the line of credit from equation (4),
D{Sub k} is the portion of the loan balance attributable to the line of credit in the kth month (i.e., the sum of all drawdowns on the line of credit since origination plus interest at the
note rate plus MIP.
where
ALC{Sub k} is the available line of credit in the kth month of the loan,
LOC{Sub k} is the principal limit of the line of credit from equation (4),
D{Sub k} is the portion of the loan balance attributable to the line of credit in the kth month (i.e., the sum of all drawdowns on the line of credit since origination plus interest at the
note rate plus MIP.
NOTE: The initial balance at origination, scheduled monthly payments, and servicing fees,
if any, are not included in D, and that D is subject to per diem interest and MIP if mid-month calculations are made), and R and T are the fixed set-aside amounts for repairs after closing and
first year taxes and insurance as required.
if any, are not included in D, and that D is subject to per diem interest and MIP if mid-month calculations are made), and R and T are the fixed set-aside amounts for repairs after closing and
first year taxes and insurance as required.
NOTE: Once repairs and first year taxes and insurance have been paid, R and T become zero for the remainder of the loan.
6.Scheduled Monthly Payments:
P = ( NPL{Sub k} - [ LOC{Sub k} - D{Sub k} ] ) *
P = ( NPL{Sub k} - [ LOC{Sub k} - D{Sub k} ] ) *
(1 + i){Sup m} x i / [(1 + i) {Sup (m-1)} - (1 + i)],
where
Pis the maximum scheduled monthly payment to the borrower
commencing in month k and continuing for a term of m months,
[For a tenure payment, m is calculated to be:
m= 12 x (100 - Borrower's Initial Age) - k + 1.
For any term less than that of a tenure payment, the
borrower may choose the number of months, m. For
calculation of monthly payment amount at loan origination,
set k = 1 in all equations. Note that for mid-month
originations, the first payment will be made in the second
month. For payment plan modifications, principal limits and
loan balances will be calculated as of the effective date of the modification,
which is the date of first modified payment.]
NPL{Sub k} is the net principal limit from equation (3),
LOC{Sub k} is the principal limit of the line of credit from equation
(4), and D{Sub k} is the portion of the loan balance attributable to the line
of credit as defined in equation (5). Note that the
difference (LOC{Sub k} - D{Sub k}) may be interpreted as the
net principal limit of the line of credit, and
where
Pis the maximum scheduled monthly payment to the borrower
commencing in month k and continuing for a term of m months,
[For a tenure payment, m is calculated to be:
m= 12 x (100 - Borrower's Initial Age) - k + 1.
For any term less than that of a tenure payment, the
borrower may choose the number of months, m. For
calculation of monthly payment amount at loan origination,
set k = 1 in all equations. Note that for mid-month
originations, the first payment will be made in the second
month. For payment plan modifications, principal limits and
loan balances will be calculated as of the effective date of the modification,
which is the date of first modified payment.]
NPL{Sub k} is the net principal limit from equation (3),
LOC{Sub k} is the principal limit of the line of credit from equation
(4), and D{Sub k} is the portion of the loan balance attributable to the line
of credit as defined in equation (5). Note that the
difference (LOC{Sub k} - D{Sub k}) may be interpreted as the
net principal limit of the line of credit, and
( NPL{Sub k } - [LOC{Sub k} - D{Sub k}] ) may be interpreted as net
principal limit available for calculating monthly payments.
principal limit available for calculating monthly payments.
