If you have ever seen a reverse mortgage quote, you know that it looks quite different than traditional loan quotes. In case you haven’t, you can see a sample reverse mortgage quote as you read the explanation.
As an aside, don’t confuse the results produced by an online reverse mortgage calculator with an actual quote for a reverse mortgage. These online calculators are helpful in that they, in an instant, can tell you whether the senior is likely to qualify. They can offer information on how much money the senior might get and in what forms they can receive it. But there are questions that these online calculators do not answer, such as interest rate details, closing costs and which of the programs presented are the best of all available choices for this particular senior. For that information, you need a quote.
There are a number of key elements found in a reverse mortgage quote. It will usually offer a comparison of two to three programs in side-by-side columns. Each column will have some form of the items listed below that define the basic financial terms of the loan. All of these terms may or may not appear on your particular quote since different reverse mortgage lenders use slightly different quote forms.
- Program Description. Be aware that you are looking at just a small sampling of the available reverse mortgage programs since there are 10 to 15 available in United States.
- Interest Rate. As of this writing, all reverse mortgages carry adjustable rates except two, so this section will show you the interest rate index and the margin that is added to the index to get your total interest rate. Two common indexes for reverse mortgage loans are used: the LIBOR and the 6 Month Treasury Index.
- Mortgage Insurance. FHA lenders add one half of one percent (0.5%) to the interest rate for ongoing mortgage insurance. All FHA reverse mortgage products have this added on, which effectively increases the interest rate by that amount. The amount does not vary from lender to lender.
- Credit Line Growth Rate. When the reverse mortgage has a line of credit component, then this is the annual percentage by which the ceiling on the credit line will increase. This rate varies with the interest rate. It would be as if your credit card company automatically increased your spending limit each year.
- Interest Rate Cap is calculated by adding a given number of points to the starting interest rate.
- Expected Interest Rate. Represents a reasonable estimate of the average rate you will see over the long run (excluding mortgage insurance). It is calculated by adding the margin to the long-term index, such as the 10 year Treasury.
- Monthly Fees. These are service fees that will be added to your loan balance each month to pay the servicer for record keeping, for the call center and to send you monthly statements.
- Value of the Home. This figure is provided by you when you tell your lender the amount that you think your home is worth. This number will be adjusted by the outcome of an appraisal.
- Lending Limit. The amount of home value that the program recognizes in calculating your principle limit and often varies by county. If your home is worth more than the limit, then the excess is ignored.
- Service Fee Set-Aside. The total amount of the Monthly Service Fees projected into the future for the homeowner’s actuarial lifetime. It reduces the principle limit for the purpose of calculating the figures that follow, but is actually charged in the future at the monthly rate.
- Principle Limit. Based on the age of the homeowners and is the maximum gross loan amount that this reverse mortgage program will offer.
- Origination Fee. The amount that the lender and/or broker is paid for their work.
- Mortgage Insurance Premium. When charged on for the program, this is a fee for FHA reverse mortgage insurance and is non-negotiable.
- Other Costs. An estimate of the total cost for title, escrow, credit check, appraisal, loan docs, notary, and other fees charged to complete your loan. For a complete breakdown, refer to the Good Faith Estimate (GFE).
- Net Principle Limit. The actual amount of money available to the homeowner after deducting the line items above.
- Total Liens and Debt. Because no unpaid liens may remain on the home, this indicates the total amount to be paid off by the reverse mortgage.
- Program is short by. If shown, then the particular program does not offer enough money to pay off the existing liens. The borrower can bring this amount to closing in order to get that program.
- Lump Sum Cash. The lump sum amount that may be received at closing of the reverse mortgage (if requested).
- Credit Line. How much money is available through a credit line (if requested).
- Monthly Advance. If requested, this is a monthly amount the lender will pay to the borrower. If “Tenure” is indicated, this amount will be paid for as long as the senior keeps the loan. “Term” indicates that the amount will be paid for a predetermined period of time.
- Total Costs and Fees. These are usually financed in the loan and represent the sum of the Origination Fee, Mortgage Insurance Premium and Other Costs.
This information should make the reverse mortgage quote easier to understand. Make sure that you talk to a reverse mortgage specialist to learn details for your particular circumstances.
Luke
Reverse Mortgage Pro
thanks so much for the breakdown, I will be able to pass this on to my branch, wea re really starting to get involved in these mortgages. This is a great resource.
Glad to help. Just make sure they use a reverse mortgage calculator to qualify their prospects, and NOT the LTV’s on the sample quote. They change daily depending on interest rates and depending on the borrowers’ DOBs.
I write for a site for “credit challenged” consumers and I think one of the unsung virtues of reverse mortgages is that they are the only financing I’m aware of where a borrower with bad credit can get the same rate as one with good credit. So in effect they are more valuable to credit-challenged homeowners than anyone else because borrowers can use the proceeds to retire debts with much higher interest rates.
Very true. Though the reverse is not only good for credit-challenged borrowers, but income-challenged borrowers. Far too many seniors come to me with a $1200 income and a $800 mortgage payment. For them, yet another refi would be financial suicide! They need a reverse mortgage to rid them of their payments permanently.
Luke, thanks for the article but you should edit it to recognize the proper CMT index for Initial Rate. Its the one year Treasury yield, not the 6 month.
Luke -
Great information. Very helpful for new reverse originators.
I’ve been reading all of your blogs on reverse mortgages. I have clients asking me for my opinion, but I’m not sure that I understand it myself. I usually turn them over to a mortgage person that I trust. So far, none of them have done a reverse mortgage. I think that once the pros and cons are disclosed, many people opt not to do it—at least that’s my experience.