Reverse Mortgage and Equity Reserve

With the Reverse Mortgage (HECM loan) not all of the homes equity is allowed to be borrowed.  Depending on the age of the youngest borrower the reverse mortgage taps approximately 50% of the equity of the home.  In some cases the remaining equity reserve diminishes over time.  However, there are many cases in which the equity reserve in the home grows over time. As an example, a couple had a home which appraised at $500,000.  The youngest borrower was age 76 and they wanted to draw $80,000 at closing to do some repairs and upgrades to the home.  Assuming an interest rate of 5.510% and a home price appreciation of 4.00% the loan balance including the $11,789 mandatory obligations started out at $91,798.  The net equity reserve at this point in time was $408,202.  Assuming that the borrower did not draw any more money from the line of credit, the equity reserve after 6 years had grown to $501,222.  The credit line had grown from approximately $141,702 to $203,045.  The loan balance at this time had grown form $91,798 to $131,537.  The point being is the loan balance grew by $39,739, while the line of credit grew by $61,343  and the equity reserve grew by $92,920.

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