mortgage

The ins and outs of reverse mortgages

How much can you borrow?

Generally, the more valuable your home, the less you owe on it, and the older you are, the more money you can extract from your home. Remember, the home must be your primary residence.

The amount you can borrow also depends on current interest rates, loan fees and the appraised value of the home or the Federal Housing Administration's mortgage limits for the area, whichever is less.

FHA does not limit the value of homes qualifying for an HECM reverse mortgage. An appraiser determines home values. However, the FHA does set limits on the amounts that can be borrowed. Currently, the loan limit for 2009 is $625,500 and will remain in effect until Dec. 31, 2009.

After that, Congress will have to approve new HECM loan limits or keep the current one in place.

According to the Federal Trade Commission, HECMs generally provide larger loan advances than proprietary loans at a lower overall cost. But owners of homes with high appraised values and small or no mortgages may qualify for larger loan advances through a proprietary reverse mortgage, though the cost will likely be higher.

Interest rates

Borrowers today have a wide range of choices in reverse mortgage products. Some feature fixed interest rates.

But most reverse mortgage products come with variable interest rates pegged to such short-term indexes as the Constant Maturity Treasury index or the London Interbank Offered Rate, or LIBOR, plus a margin, according to David Cesario, executive vice president of sales and marketing at 1st Reverse Financial Services in Westmont, Ill.

"You may have a Treasury with a 150 to 175 basis point margin (a basis point is one one-hundredth of a percentage point). So you'll hear it sometimes as an HECM-175, which means the 175 is the margin over the index," Cesario says.

"There are also loans now like the HECM-100 LIBOR, so you'll have a 100 basis point margin over the LIBOR index."

For example, if the interest rate on the LIBOR were 3.5 percent and you had an HECM-100 LIBOR loan, the rate on the loan would be 4.5 percent. Keep in mind, though, that rates are low in the current environment, and may very well go up in the future.

Understand, too, that the interest is charged on the outstanding balance and accrues over time, increasing the loan amount. This is the magic of compounding interest at work in reverse -- meaning it favors the lender instead of you.

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