How Does A Reverse Mortgage Calculator Work?

Reverse mortgage calculators are a great tool for anyone who is considering supplementing their retirement income. Not many people understand exactly how these calculators work.

Of course, a lot of people don’t really understand how reverse mortgages work. Essentially, these financial products allow seniors to pull the equity out of their home in the form of either a lump sum or a series of monthly payments. Receiving monthly payments is the most popular option, however. In many ways, they function a lot like an annuity. This type of funding provides the capital to purchase an annuity, giving individuals or couples over the age of 62 a steady source of monthly income.

Figuring out exactly how much a couple or individual can expect to receive from a reverse mortgage can be complicated, however. The exact amount depends on the amount of equity in the home, as well as current interest rates and the conditions that are set on the mortgage.

Computing equity can be complicated. While it is possible to borrow up to 125% of the equity in a home, it can be difficult to determine exactly how much equity a person of couple has in their home. A reverse mortgage calculator will have you input an estimated value for the home, as well as the amount of money that you still owe in order to figure out how much equity you have and the amount that can be withdrawn.

Rather than just dividing this amount out equally over the next several years, however, a reverse mortgage will invest the money and pay out a portion of the investment. When interest rates and investment returns are high, this could mean higher monthly payments. A calculator specific to this type calculation will ask questions about the expected interest rate and investment returns in order to compute a monthly amount. Because investment returns can vary, many people run the reverse mortgage calculator several times to try out different investment scenarios.

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Finally, the terms of the funding can affect the monthly payout amount. For example, some terms allow their monthly payment to increase in response to inflation every year. This usually means accepting slightly lower payment at first in return for knowing that if inflation suddenly increased, you would still have the same purchasing power. Other reverse mortgages have clauses that state an individual or couple will receive monthly payments for the rest of their lives, while others define a tern such as ten or thirty years.

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