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Reverse Mortgages

Estimating Leftover Equity

How much of your available loan amount would you take as a lump sum, as a creditline, or as a monthly advance? For what reasons would you take withdrawals from a reverse mortgage creditline?

These are important questions to think about, especially if your home equity is one of your few financial assets. Very simply, the more equity you use now, the less will be left for the future. If you spend all your available loan funds too soon, you won't have any left for the future. And if you then need more money to remain living in your home, you may have to sell and move.

But if you ever have to move, you would need to have money to pay for the cost of moving, future living expenses, and possibly assisted living or other types of care or housing. So the amount of leftover equity remaining when you do sell the house could be very important to you.

Leftover Estimates

Reverse mortgage counselors and lenders can estimate how much equity would be left at various future times. The estimates are based on assumptions about future interest rates, your loan advances (how much and when), and changes in your home's value.

These estimates generally assume that your home would be sold to repay the loan. So they deduct the estimated cost of selling your home from your remaining equity. Then if the amount they estimate that you'd get from the sale of your home is more than your estimated debt, you (or your heirs) would get paid the difference. If at any point your rising debt (how much you've been paid plus interest) catches up to your home's value, then there would be no equity left for you or your heirs.

Unless your counselor or lender uses computer software based on AARP's model specifications, the leftover equity estimates they provide may have shortcomings similar to the ones discussed in the article about TALC rates.

Most reverse mortgage borrowers select a creditline. The amount of leftover equity at the end of a creditline loan depends primarily on the size and timing of the cash advances a borrower requests during the loan.

Computer software based on AARP's model specifications gives you a more accurate estimate because it lets you enter the creditline draws that you expect to make. Other loan software may not permit you to see how your expected creditline draws would affect your leftover equity. Other loan software may also assume that the initial interest rate will never change. But that's highly unlikely, especially if you get the loan when rates are very low. So these shortcomings can overestimate your future leftover equity.

Software based on the model specifications lets you select the interest rate used to estimate your leftover equity. So you can choose a higher rate than the one that is initially charged on your loan. By varying these factors, you can see how much effect each can have on your leftover equity. You should remember, however, that all of these figures are estimates. The actual figures will depend on the actual creditline advances you select during the loan; the actual interest rates charged on the loan; and the actual changes in your home's value during the loan.

HECM Creditline Growth

Most Home Equity Conversion Mortgage (HECM) borrowers take their money as a creditline. So it's important to be able to see how creditline withdrawals affect the growing amount of credit available from a HECM.

Reverse mortgage calculators can show the effect of various creditline withdrawal patterns on a year-by-year basis. To see them, run the calculator. Then, on the Loan Calculator Estimates page, click the "Creditline" button toward the bottom of the page, and follow the instructions.

Computer software based on AARP's model specifications can also show the effect of different creditline withdrawals on your future loan balance, total amount owed, and total annual average loan cost.

If you take a HECM creditline, keep an eye on its growth. Knowing how much cash remains in your creditline—and the rate at which it is growing—helps you make decisions about cash withdrawals.

You control the amount of credit that remains in your account. The less cash you take out now, the more remains for later. It doesn't make much sense to set up a creditline and then not use it. But you should also avoid using too much too soon. For example, if you spend all the cash in your creditline, and can't pay your property taxes and homeowner's insurance, the lender can foreclose on your loan. Just like a forward mortgage, if you do not pay your property taxes and insurance, you could lose your home. Always leave enough cash in your creditline to pay your taxes and insurance if you do not have other funds available for this purpose.

AARP does not endorse any reverse mortgage lender or product.

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