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Reverse Mortgage Selection Options and Calculations

7th January 2020

Do you want to retire in style, or at least comfort? If so, you might want more money coming in than just your expected retirement income. At least temporarily, you can increase the amount of money available to you by taking out a mortgage on your home. A retirement mortgage called a reverse mortgage is often the best choice because you do not have to pay any part of it back for many years. However, you need to understand reverse mortgage calculations and know your options before you sign up.

Your Home and Its Available Borrowing Value

The cash value of your home is called its equity. That value changes over time based on the age, condition and location of the home, as well as other factors. The total value at any given time is also never available to borrow. The government does not allow that as a protective measure. Additionally, you cannot borrow any portion of funds already tied up, such as when a traditional mortgage is already in place. You have to consider all of those factors when figuring out if your home even has a current value high enough to borrow against. 

The best way to know exactly what you can borrow is by making complicated calculations. That is why there are tools called reverse mortgage calculators available to do the work for you. A reverse loan calculation program figures out exactly how much you can borrow and sets standards like the size of monthly installments, if necessary.

Government Reverse Mortgage Sources Offering HECMs

There is more to signing up for a reverse loan than just figuring out the value of your home. The reverse mortgage calculator is helpful for that, but you also have to start out by finding a lender you can trust. One option is to visit government lenders. If selecting the best reverse mortgage lender is important to you, you definitely need to consider them. Mortgages issued by government lenders are called home equity conversion mortgages (HECMs). HECMs are usually offered through federal agency offices, like your nearest HUD office. HECMs are federally-insured, which is their biggest perk. They are also governed by universal rules.

Private (Proprietary) Reverse Mortgage Lenders

On the flip side of the coin, there are proprietary lenders. They are lenders not affiliated directly with the government, such as your local small bank. There are multiple advantages of proprietary lenders. For example, you might know the exact people you are doing business with, or you may have at least done business with that same institution in the past. That provides a level of mutual trust. Additionally, you might like the idea of supporting a local institution, and the institution itself might offer special deals for local residents.

The potential downside of doing business with a proprietary lender is the lender is not obligated to follow the same strict guidelines attached to an HECM. There can be wide variations in the rules and regulations from one proprietary lender to the next. Therefore, when doing business with one, it is important to fully understand the terms of the contract before signing it.

Make Your Decision Based on the Big Picture

When choosing between a government HECM of a private reverse loan offered by a small institution, you have to look at the big picture. Consider the rates offered, interest, closing costs and other fees. Also, think about the insurance or other perks offered by each lender. Make sure you ultimately choose the option that makes you feel the most comfortable, not only at the time of establishing the contract, but also in the future. 

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