In reverse mortgage, the greatest loan amount payable to a home owner or the full amount of the equity up front usually depends on five issues - the present and future value of the property, the age of the home owner(s), lender profits and costs, the amount of equity conserved from exchange and the plan of the reverse mortgage. Now, we shall discuss each of these factors briefly below.
A reverse mortgage will fetch the home owner more equity advance, provided the value of his or her property is high and the local real estate market is secure. Normally, the lender or mortgagee appoints a professional property valuator to ascertain the amount of money he should lend against the property and if the property is in good shape it is likely to have a positive effect on the lending value. In other words, a well maintained property will get the home owner a larger amount of equity in reverse mortgage. To the creditor, the lending value of a property represents the price of the property if it needs to go for a quick sale to recover the sum of the principal amount and the recurring interest on it from the borrower. On the basis of the existing real estate sale data, the creditor decides, on the yearly raise, of the future property's value. While deciding on a reverse mortgage, it is virtually immaterial as to for how long the home owner has possessed the property. The fact is that a property may be purchased on one day and the equity converted on the following day in case one can arrange for a reverse mortgage that fast.
It is interesting to note that in reverse mortgage, the older the home owner is the better payments he or she can get for their equity on the property. The reason behind this is simple. As you are aware that each property corresponds to a fixed amount of equity, therefore, if the equity amount is paid over a shorter period of time, it will naturally spawn bigger individual imbursements as very few numbers of payments will have to be made. While working out the equity payments, the creditors of reverse mortgage rely on their estimation of the borrower's life expectancy. The data collected by the lenders gives a fair idea regarding how long a person can be alive further than a particular age. In brief, the older the person, the shorter will be his or her life anticipation and this translates into lesser numbers of equity payments. Gender also plays a crucial role in deciding on the equity payment in reverse mortgages as statistics have shown that usually women tend to be alive longer than men. For instance, a 66-year-old woman will usually live for another 18 years to reach her normal life expectancy of 84 years. On the other hand, a 66-year-old man will live for another 14 years to complete his normal life expectancy of 80 years. The reverse mortgage plan also offers benefits to the older home owners too, because there is less time for the interest on the balance to build up.
Normally the amount of equity payments to the home owners are greatly reduced owing to the lender's profit margin as well as several borrowing costs like administration charges and interest rates. It must be remembered that reverse mortgages do not come free, but incur the expenses of growing and managing the home equity exchange program built into it similar to the charges which are an integral part of any other financial product. In fact, expenses on legal fees, sales commissions and advertisement charges include a great segment of the lender's expenses. In addition, creditors who themselves borrow money from others to offer reverse mortgage to home owners have to incur additional expenses as they too have to pay interests to their financers. Basically, the lenders obtain their profits from the difference between the interest they pay to their financers and what they receive from the home owners of reverse mortgage or 'spreads'.
The term 'spreads' may not be familiar to most, but an 'interest spread' is actually the variation between what the lender pays to borrow the money for the equity up front payment to the home owner for reverse mortgage and what the home owner pays the lender to utilize the sum released as the equity up front. For instance, the creditor may have borrowed money from his financer at an interest rate of 10% and lent out the money to the home owner as equity advance at an interest of 11%. Hence, interest spread of 1% denotes 1% profit for the mortgagee. The lender also earns profit from the interest spread between the reverse mortgage interest charge and the interest charged on the annuity. For example, considering that the annuity provided by the mortgagee is 9% and the reverse mortgage interest charge paid by the home owner is 11%, the lender earns a profit of 2% spread.
On the other hand, the home owner too incurs several costs in acquiring a reverse mortgage. These expenses include application cost, property evaluation charges, closing expenses or legal costs incurred towards finalizing the agreement, serving or management charges and finally the expenses towards paying interest charges. The lender's direct expenses comprise legal bills, sales commissions, advertising or promotion of his business as well as paying interest charges to the investors. Incidentally, all such direct costs incurred by the lender are included in the reverse mortgage as indirect expenses to be paid by the borrower or home owner.
Here it is an interesting game of numbers whereby the more the equity is protected and not converted, the lesser is the equity available for reverse mortgage imbursements. In other words, if the home owner keeps a large portion of his equity on the property to himself and makes only a little part of it available for reverse mortgage, the payments received by him too will be much less. The equity that remains with the home owner even at the finish of the reverse mortgage is known as residual equity. This sum of equity is possessed by the home owner or to the legal inheritors of the home owner's property.
It may be mentioned here that the amount of equity payment to the home owner also depends largely on the particular category of reverse mortgage selected by him or her. For instance, if the reverse mortgage is for a longer period, the amount of payment will be less. In addition, if a home owner chooses a combination of reverse mortgage program and receives a one time large payment at the beginning of the reverse mortgage, the subsequent instalments will be of lesser amounts. In such an instance, the up front equity available will also be reduced substantially.