Reverse Mortgage: What Is The Maximum Loan-To-Value?

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One of the more puzzeling aspects for reverse mortgage borrowers is understanding how much home equity is necessary in order to be eligible for a reverse mortgage home loan. Reverse mortgage borrowers are looking for a set formula or a maximum loan-to-value percentage ratio. Unfortunately, there is not a uniform ratio.

Reverse mortgage borrowers frequently ask: "What is the maximum loan-to-value for a reverse mortgage home loan?"

The answer is a bit complicated and not a straight forward, one-size-fits-all answer. What I mean by that, is that most of the time if you are shopping around for a regular purchase or refinance mortgage, a loan officer will tell you something like; The maximum LTV (loan-to-value) is 90% or 80% or some other percentage depending on what type of property is being financed and how the property will be used - for example, owner occupied or rental, single family home or condominium, etc.

A Reverse Mortgage Is Not Calculated The Same Way

For a reverse mortgage loan there is not a pre-set loan-to-value ratio or percentage that is used across the board for all borrowers. Instead, there is a sophisticated mathematical formula used that is based on several key factors which determine how much money any given borrower will be able to receive from a reverse mortgage loan. For lack of a better way to explain it, each borrower is treated individually and each loan amount maximum is customized for each individual reverse mortgage borrower.

The key factors that go into the formula are:

* The age of the youngest borrower

* The current interest rate

* The appraised value of the home

The easiest way to explain the calculations is to say that they are based on insurance actuarial tables for the life expectancy of the borrower that is expected to live the longest number of years into the future, (which is usually considered to be the youngest borrower on the loan.) The lender does not want to offer more money to the borrowers today than the home will be able to be sold for at the end of the lifetime of the last borrower to leave the home permanently.

The other two factors; the current interest rate and home value factor into the formula as well. The higher the interest rate the faster the accumulated equity will be eroded away, because interest on the outstanding loan balance is compounded over the life of the loan. This is why a reverse mortgage is often referred to as "A rising debt, falling equity loan."

The appraised value of the home directly effects the borrower's equity stake in the property. The higher the home value, the higher the amount of equity that the homeowner can access through a reverse mortgage loan. Unfortunately, at the present time both of the last two factors have been working against prospective reverse mortgage

Declining Home Values Are Taking a Huge Toll

Property values across the country are declining at alarming rates and at the same time interest rates are marching in an upward direction. This is a lethal combination for senior homeowners in need of tapping into home equity in order to supplement retirement lifestyles or eliminate existing mortgage debt.

Many borrowers that could easily have accessed their home equity a couple of years ago are finding that they are being offered far less money today in the way of a loan amount, than they would have if they had locked in their reverse mortgage loan when their home value was at its' peak just a few short years ago.

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