Although you can obtain a reverse mortgage privately, FHA provides a level of safety as it is government regulated.
FHA has a maximum amount that can be obtained as a reverse mortgage, calculated as follows:
(1) This must be the first mortgage (so others must be paid off before-hand or with the proceeds)
(2) For each year over age 62, the formula limit is increased approximately 2%
(3) Rate used is based on 10-year Treasury rates
(4) The low interest rates (in the 2010 market place) provide for a higher amount available to borrow than in high interest rate environments
NUMERATOR:
(5) [ (Appraised home value or FHA maximum for your area) x (1 + CPI rate)^ Client's remaining life expectancy] . . . in this formula the symbol ^ means "raised to the power of" (for example, 20 if you were 75 years old)
DENOMINATOR:
(6) [ (1 + 10-year Treasury Rate) + (FNMA spread, which has been 1.5% but does change) ]
For example, a $300,000 house for a 75 year old with 3% expected growth rate in CPI and 10-year Treasury rates of 3.5%, results in slightly more than $200,000 available for a reverse mortgage.
Closing costs can be 4% or more of the loan and can be paid from proceeds but are most likely lower than closing costs on the private market.
I still believe that there are only rare instances where this is the better alternative than other options (see other posts in this blog under: Debt-Mortgages) but it can work.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.