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Rate of return used for asset depletion mortgage

What rate of return do lenders use to calculate monthly income from assets for an asset depletion mortgage? I have seen 4% - 5%, which seems high considering the current low interest rates on treasuries.

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Most asset depletion mortgage lenders use a 4% or 5% rate of return to calculate a borrower's monthly income from assets.  Although 4% - 5% seems high compared to current treasury rates, it is less than historical rate of return provide by the stock market (approximately 7%).  

Please note that calculating the additional monthly income from the assets is similar to calculating the monthly payment for a mortgage. For example, for $500,000 in assets at a 4% rate of return over 15 years, the additional borrower monthly income attributable to the assets is $3,698.  $3,698 also equals the monthly mortgage payment on a $500,000 mortgage with a 4% interest rate and 15 year term.

Additionally, applying a rate of return to a borrower's assets is one of two methods asset depletion mortgage lenders may use to determine additional borrower income.  Using the rate of return approach, lenders apply a rate of return to a borrower's net eligible assets and divide the income by 85 minus the borrowers age.  For example, if the borrower is 60, the lender divides the income from assets (based on a set 4% or 5% rate of return) by 25 to calculate the borrower's monthly income from assets.  The income calculated using the asset depletion formula is added to any other income the borrower earns such as from a job or pension.

Instead of using the rate of return method, some asset depletion lenders simply divide a borrower's net eligible assets by the length of the mortgage, in months.  For example, if a borrower has $500,000 in net eligible assets and is getting a 30 year mortgage, the lender divides the $500,000 in assets by 360 (30 years * 12 months per year = 360) to calculate the $1,389 in monthly income attributable to the assets.  Please note that this method usually yields a lower monthly income from the assets than the rate of return method.

We recommend that you review our comprehensive asset depletion mortgage overview and contact three-to-four lenders to understand the method and rate of return they use to calculate monthly income from assets.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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