Reverse Mortgage Calculator

The Inputs a Calculator Uses

Behind every estimate sit a handful of facts. Knowing what each one does makes the result much easier to read.

Most calculators are built around the Home Equity Conversion Mortgage, or HECM. According to HUD's HECM program page, the HECM is "the only reverse mortgage insured by the U.S. Federal Government," and it is the Federal Housing Administration's (FHA) reverse mortgage program, available only through an FHA-approved lender. Congress authorized it in 12 U.S.C. § 1715z-20.

Age. The calculator asks for the age of the youngest borrower, or of an eligible non-borrowing spouse, meaning a spouse who is not on the loan but meets HUD's rules to stay in the home. Under 24 C.F.R. § 206.33, "The youngest borrower shall be 62 years of age or older at the time of loan closing." Older age generally produces a higher estimate.

Home value. The tool uses your estimated value as its starting point. Later, a lender uses an appraisal, a professional's formal opinion of the home's value.

Mortgage still owed. An existing balance must generally be paid off when the reverse mortgage closes, which reduces what is left. The CFPB notes that the borrower can use their own funds or reverse mortgage money to do this. Families in that position can read more about retiring with a mortgage still owed.

Interest rate. The calculator assumes a rate. A lender's actual rate will differ.

There is also a cap on the home value counted, called the maximum claim amount. FHA sets it, and HUD publishes the current figure each year.

Knowing what goes into the estimate helps you judge how much weight to give the result.

How the Principal Limit Is Calculated

The key word here is "principal limit." It means the most a borrower can access under a HECM. It is not the same as the home's value, and it is usually well below it.

According to the CFPB's page on how much can be borrowed, the principal limit "takes into account your age, the interest rate on your loan, and the value of your home." HUD's page adds that the amount depends on the lesser of the appraised value, the HECM FHA mortgage limit, or the sales price.

FHA turns those facts into a number using a principal limit factor, or PLF. A PLF is a percentage. It is applied to the lesser of the appraised value or the maximum claim amount. The PLF rises as the youngest borrower gets older and falls as the expected interest rate rises. In the CFPB's words, loans with older borrowers, higher-priced homes and lower interest rates generally have higher principal limits. FHA publishes the current PLF tables, which lenders use.

Here is a hypothetical illustration, not a prediction. Suppose the PLF for a borrower's age and rate were 40 percent. The principal limit would then be 40 percent of the home's counted value. That 40 percent is invented for this example only.

The principal limit is still not what a borrower walks away with. Closing costs, any existing mortgage payoff, and any amounts set aside for property taxes and insurance come out of it first. What remains are the net proceeds.

How You Could Receive the Money

A calculator may show several numbers at once, one for each way the money can be paid. The figures differ because each option is built differently.

The CFPB describes three main options: a line of credit, a monthly payout, or a lump sum. The statute lists the methods in full in 12 U.S.C. § 1715z-20(d)(9): a line of credit; monthly payments over a term the borrower picks; monthly payments over a term combined with a line of credit; monthly payments over the borrower's tenure; tenure payments combined with a line of credit; or any other basis HUD considers appropriate. The borrower may generally switch methods during the loan, though HUD may limit this for fixed-rate loans.

Line of credit. Money is drawn as needed. The CFPB explains that the unused part "will keep growing," up to a maximum stated in the mortgage.

Term payments. Fixed monthly payouts for a set number of years.

Tenure payments. Fixed monthly payouts "as long as you maintain the reverse mortgage and the payout does not cause the balance to exceed the amount stated in the mortgage," as the CFPB puts it.

Lump sum. Everything at once. The CFPB notes the amount available may be lower than with other options.

Whatever the method, a lender pays under the loan's terms. Interest and charges are added to the balance, so the amount owed grows. The borrower must keep living in the home as a principal residence, pay property taxes and homeowners insurance, and keep up the home. The loan comes due when the last borrower dies, sells or moves out.

Two other categories exist outside FHA. Proprietary reverse mortgages are private loans, not FHA-insured, sometimes offered for higher-value homes. Single-purpose reverse mortgages come from some state or local agencies and nonprofits, for one use such as repairs or property taxes.

What the Calculator Leaves Out

A clean number on a screen can hide a good deal. This is the part families sometimes wish they had seen first.

The growing balance. The CFPB's overview of reverse mortgages says plainly: "Interest and fees are added to the loan balance each month and the balance grows." An opening estimate shows today, not what is owed years from now, unless the tool includes a future-balance view.

Ongoing duties. The same CFPB page says homeowners must pay property taxes and homeowners insurance, use the home as their principal residence, and keep the house in good condition. Under 24 C.F.R. § 206.39, the home must be each borrower's principal residence at closing. Falling behind on these duties can make the loan due. A reverse mortgage does not remove the risk of losing the home.

When it comes due. The regulation at 24 C.F.R. § 206.27(c) lists due-and-payable events, including a borrower's death when no surviving borrower lives there, the home ceasing to be a principal residence, more than 12 consecutive months away due to physical or mental illness when no other borrower lives there, and unpaid property charges. A deferral can apply for an Eligible Non-Borrowing Spouse who meets HUD's requirements.

Costs. Closing costs include an origination fee, FHA mortgage insurance premiums, appraisal, title and other charges. Federal rules limit the origination fee and allow it to be financed into the loan; the lender discloses the actual amount. The statute requires full disclosure of all costs and, before closing, a statement of the loan's projected total cost.

Change. A calculator cannot foresee home values, rate changes on an adjustable-rate HECM, or a borrower's future health.

The Required Counseling Step

Before a HECM can go forward, a conversation with a counselor is required. This is not a sales meeting, and it is not optional.

Federal law says a HECM borrower must have "received adequate counseling" from an independent third party, under 12 U.S.C. § 1715z-20(d)(2)(B). That counselor cannot be associated with or paid by anyone originating or funding the loan, or selling annuities, investments, long-term care insurance or other financial products. HUD's lender guide records a HECM counseling certificate number for each case, and describes counseling by a HUD-approved HECM counselor as required.

The statute says the counselor discusses topics including:

• Other options. These include other housing, social service, health and financial options.
• Other equity programs. Examples the statute gives are sale-leaseback financing, deferred payment loans and property tax deferral.
• Financial effects. What entering into the loan means financially.
• Wider effects. That a HECM may have tax consequences, affect eligibility for federal and state assistance, and have an impact on the estate and heirs.

The CFPB adds that counseling covers eligibility, the financial implications of the loan, and alternatives.

To find a counselor, HUD's HECM program page points to its HECM Counselor Roster and to (800) 569-4287. The Consumer Financial Protection Bureau, at consumerfinance.gov, also publishes plain-language consumer information about reverse mortgages, including a warning that the Department of Veterans Affairs does not offer reverse mortgage loans.

Turning a Calculator Result Into a Real Next Step

Once the number is on the screen, the natural question is what to do with it. Its best use is modest: a first look at rough scale, not a final answer.

The estimate will change. A licensed appraiser values the home. A lender applies its current rate and fees. The borrower's actual situation is reviewed, including any mortgage or federal debt owed. The CFPB notes that a HECM borrower generally cannot owe federal debt, such as federal income taxes or federal student loans, though reverse mortgage money may be used to pay it off.

A reverse mortgage is also one option among several, each with its own tradeoffs:

• Home equity loan or line of credit. Borrowing against the home with monthly payments. The reverse mortgage vs HELOC comparison sets the two side by side.
• Cash-out refinance. A new, larger mortgage that pays out the difference and brings a monthly payment.
• Selling or downsizing. Turning equity into cash by moving somewhere smaller.
• Property tax relief. The CFPB notes that many localities have programs to help with property taxes, and points to county or town tax offices and benefitscheckup.org.
• Help from family. Support or shared costs arranged among relatives.

For owners without a mortgage, the ways to get money from a paid-off house follow the same range.

The step that usually comes after a calculator is HUD-approved counseling, which is required before a HECM in any case. A counselor can walk through the alternatives in light of a household's facts.