Retirement Researcher Develops Reverse Mortgage Calculator

One avid retirement researcher has recently developed a new calculator that allows prospective reverse mortgage borrowers to find out the principal limit available to them through a Home Equity Conversion Mortgage (HECM).

The HECM calculator is the latest effort from Wade Pfau, professor of retirement income at The American College, who has produced a series of articles, webinars and research on using reverse mortgages and retirement income planning in recent weeks.

The calculator requires users to input information regarding their home’s appraised value, the 10-year LIBOR swap rate, lender’s margin, age of youngest spouse, among other factors, to calculate the net principal limit that borrowers may be eligible to receive.

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To determine the total upfront costs, inputs such as the “Loan Origination Fee” and “Other Closing Costs” are combined with the predetermined cost for the Initial Mortgage Insurance premium, Pfau writes in a recent Forbes article detailing the launch of the calculator.

Additional inputs ask users for the “Percentage of Upfront Costs to Financed” by the loan, which Pfau notes would be 0% if costs are financed from other sources; 100% if fully financed by the loan, or any number in between.

The final input is the amount of “Life Expectancy Set-Aside” requirements that have been determined as part of the Financial Assessment.

Finally, the calculator provides the net amount of loan proceeds available as either tenure or term payments, which are both provided as monthly and annual values.

Pfau’s calculator determines tenure payment assuming a planning horizon of age 100 and the expected rate, plus the ongoing mortgage insurance premium.

The term payment is calculated for a fixed term, though Pfau notes that if the desired number of years for the term payment should extend beyond age 100, the term payment is automatically adjusted to be the higher value of the tenure payment.

Read more at Forbes.

Written by Jason Oliva

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  • As of 3/31/2016 at 5 PM PDT, the calculator is unacceptable.

    There is no place to put mandatory obligations other than upfront costs or to put any payouts to borrowers at closing. For example, there is no place to put a payoff of an existing mortgage or a $25,000 payout to the borrower at closing.

    It cannot calculate the age of the youngest borrower or if applicable, a younger qualified non-borrowing spouse at closing. There is no place to put the anticipated date of closing and the birthdate of the applicable individual, although there is a slot for the age of the youngest eligible spouse (I assume if the borrower is single, over 60% are, then the age of the borrower would go there). The problem is if the closing date is in the future and by that date the applicable person will be within a half year of their next birthday (most will be) and the user uses the current age without rounding to the age as of closing, the principal limit factor will generally be too small.

    From his writings, it is clear that the author believes he understands HECMs but in so many important but technical ways, he simply does not; yet that should change for the positive with time.

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