How Much Does A Reverse Mortgage Pay And How Much Does It Cost
For those who are at least 62 years old, taking out a reverse mortgage is one way to supplement your income in your retirement years. As long as you live in the home and have a decent amount of home equity, you are likely to be eligible.
However, these programs can be complicated and are not right for everyone. Thats why you should understand all the details before you make a decision.
Below, we explain how a reverse mortgage works, including how much it pays and how much it costs.
Your Heirs Could Inherit Less
Homeownership is a key path to building generational wealth. However, a reverse mortgage usually requires the home to be sold to repay the debt. When you die, heirs will be required to pay the full loan balance or 95% of the homes appraised value, whichever is less. Usually, that means selling the home or turning the property over to the lender to satisfy the debt.
Not to mention, a reverse mortgage eats away at your homes equity. By the time it needs to be paid off, there may not even be any equity to be left to your heirs.
How Much Money Can I Get From A Reverse Mortgage
A reverse mortgage is a home equity loan option for homeowners who are 62 years of age and older. The amount of money you can get with a reverse mortgage varies greatly from person to person Variables include your age, property value and mortgage balance. These all play a role in determining how much of your home value you will be able to access, which can be estimated using a reverse mortgage calculator.
However, only a lender will be able to give you an exact dollar amount using current interest rates and program fees, as well as the appraised value of your home.
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Equity Requirements For A Reverse Mortgage
There is no fixed equity requirement to borrow a reverse mortgage. The FHA-insured HECM is the most common reverse mortgage type in the U.S.A.
According to its eligibility standards, the borrower must meet one of the following reverse mortgage requirements:
- Must fully own their home
- Must have a considerable amount of equity in the house
As a rule of thumb, you should have at least 50% home equity to qualify. This is because you must use your HECM proceed to pay off any remaining debt on your home loan first before beginning to provide you with any reverse mortgage funds.
Your reverse mortgage lender considers your age, loan type, current interest rates, financial situation, and a few other factors to determine the exact amount.
The more home equity you have and the less you owe on your existing home loan, the more money youll receive for other purposes.
What To Ask A Lender About Reverse Mortgages
Before getting a reverse mortgage, ask your lender about:
- how you can get the money from a reverse mortgage
- if there are any fees you have to pay
- what interest rate you have to pay on the money you borrow
- what can cause you to default on the loan
- any penalties you have to pay if you sell your home within a certain period of time
- how much time you have to pay off the loans balance if you move
- how much time your estate has to pay off the loans balance if you die
- what happens if it takes your estate longer than the stated period to fully repay the loan when you die
- what happens if the amount of the loan ends up being higher than your homes value when it’s time to pay the loan back
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Can You Lose Your House With A Reverse Mortgage
As with any mortgage, there are conditions for keeping your reverse mortgage in good standing, and if you fail to meet them, you could lose your home. The ways you could violate the terms of a reverse mortgage include:
- The home is no longer your primary residence.As part of the reverse mortgage agreement, the home must be your primary residence. This means that you cannot leave the home for more than 12 consecutive months, explains Michael Micheletti, spokesperson for Unlock Technologies, a company that helps homeowners access their equity. This rule doesnt bar you from leaving your home to travel or to come and go as you please, but if you vacate the property for 12 consecutive months, the reverse mortgage loan becomes eligible to be called due and payable.
- You decided to move or sell your home.If you have to move and put your home up for sale as part of the move, youre still bound by the requirement to live in the house for 12 consecutive months. If selling your home becomes a challenge and you dont find a buyer within that 12-month window, the reverse mortgage can be called due, Micheletti says.
- You dont pay your property taxes or homeowners insurance. Even with a reverse mortgage, youre still responsible for paying property taxes, and failure to do so could violate the terms of your loan. In addition, you must maintain current homeowners insurance.
When Reverse Mortgages Are Appropriate For Eldercare
Many seniors are in a situation where they do not have the income or savings to pay for personal care, for home modifications to enable aging in place, or for long term care insurance. However, they do have financial resources tied up in their home ownership. For some of these seniors, a reverse mortgage is a good option. That said, every familys situation is unique, and in some cases, a reverse mortgage is not the best option. Follows is an exploration of varying scenarios and why different families might opt for or against the use of a reverse mortgage.
Single Seniors in Fair HealthReverse mortgages are a good option, as the elderly individual does not require immediate care. Many seniors in this situation will continue to live independently in their home for some years. And they can use the proceeds from a reverse mortgage to buy long term care insurance and / or make modifications to their home. This, in turn, makes the home safer and more accessible, which can prolong or allow them to age at home indefinitely.
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It Could Impact Your Other Retirement Benefits
A reverse mortgage may not be considered income for tax purposes, but it could impact your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income . Its a good idea to discuss this with a benefits specialist to make sure your eligibility wont be compromised.
How An Equity Release Agreement Works
One option is for one or more investors to buy portions of your home’s equity through a property investment fund. You pay fees which are periodically deducted from the remaining equity in your home. The investor’s share of your home’s equity goes up over time, and yours goes down.
For example, suppose your home is currently worth $500,000. You sell 20% of your home’s equity in return for a lump sum of $100,000. The fee charged by the fund may vary, depending on your circumstances and the agreement. If the fund charges an initial fee of $30,000, it may take $130,000 of your equity to cover both the lump sum and periodic fee.
Additional amounts of equity are deducted each time the periodic fee falls due . The fee is a set percentage of the fund’s equity in your home. So, as the fund’s share of equity increases, the fee goes up.
When the equity release agreement ends, and your home is sold, the fund gets their share of the proceeds. That is, the proportion of your home’s equity they have accrued. You or your deceased estate get the remainder of the proceeds, if any.
The proportion of home equity you keep will reduce over time, and could even go down to zero.
Check your agreement to see what happens if your equity goes down to zero. Make sure you can continue living in your home, until sold by you or your deceased estate.
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How Much Money Can You Get From A Reverse Mortgage
The amount of money you can get from a reverse mortgage depends upon a number of factors, according to Boies, such as the current market value of your home, your age, current interest rates, the type of reverse mortgage, its associated costs and your financial assessment.
The amount you receive will also be impacted if the home has any other mortgages or liens. If theres a balance from a home equity loan or home equity line of credit , for example, or tax liens or judgments, those will have to be paid with the reverse mortgage proceeds first.
Regardless of the type of reverse mortgage, you shouldnt expect to receive the full value of your home, Boies says. Instead, youll get a percentage of that value.
How Do Reverse Mortgages Work
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you dont have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages offered by some state and local government agencies, as well as non-profits proprietary reverse mortgages private loans and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages .
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Reverse Mortgage Benefits Payouts And Restrictions
Reverse mortgage benefits are very flexible and can be paid in the methods described below or a combination of those methods.
- Lump Sum Payment This is typically used to pay off an existing mortgage or make a major purchase such as retro-fitting a home to improve its accessibility for the elderly. Medicaid, VA Pension, and SSI recipients should investigate how a lump sum payment might affect their eligibility.
- Monthly Payments A senior can receive guaranteed monthly payments for a set period of time or for as long as the home is their primary residence . This is referred to as a reverse annuity mortgage.
- Line of Credit This allows the senior to decide when they need the money and how much to borrow. Interest is not charged on the balance of the loan that is not taken.
- Modified Combination A senior can opt to receive a line of credit, as well as monthly payments for the duration that the home is their primary residence, or for a set period of time.
There are no restrictions on how the proceeds from a reverse mortgage can be used.
Reverse mortgage proceeds are commonly used to pay for home care, assisted living / nursing home care , home modifications to allow aging in place, and even to purchase long term care insurance.
Other factors that determine how much seniors can borrow include their age, interest rates, and equity owned. The older the homeowner, the higher value the home, and the more of the home the senior owns, the greater the amount they can borrow.
You Could Also Consider A Heloc
If you dont want to go through the whole process of taking out a reverse mortgage, you may want to try a HELOC instead. HELOC stands for home equity line of credit and operates somewhat similarly to a reverse mortgage, but you get a line of credit only when you need it. That line of credit comes from the equity you have in your home .
A HELOC essentially operates like a credit card, with the limit being the amount of equity you have in your home.
is an example of a company that offers HELOCs and they make it much easier than you would think. All it takes is a few minutes to fill out their application process, and you could have your HELOC in a matter of just a few days. And if you have questions , you can get access to live support in under a minute!
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A Reverse Mortgage Calculator Example
Assume you are 65 and own a $300,000 home with $50,000 left to pay off on an existing mortgage. You might qualify for a reverse mortgage loan of around $120,000 .
Yet, that does not mean that you immediately get access to $120,000.
The reverse mortgage company will first cut a check to your current mortgage holder. This will pay off your existing mortgage. This happens first and foremost so you do not have the option to bypass that to access the full $120,000.
This will give you the HUGE benefit of eliminating your monthly mortgage payments. Which in turn improves your monthly cash flow.
Bear in mind that property taxes and homeowners insurance are still your responsibility.
What Is The Maximum Age Required To Qualify For A Reverse Mortgage
The reverse mortgage is available for those older than 62 years, and there is no maximum age required for one to qualify for the mortgage. Statistics show that adults aged 62 and 75, are actively applying for a reverse mortgage. The older the borrower of the reverse mortgage is, the more he can qualify for, but this is also dependent on the value of the property. This is based on the fact that older people have a lower life expectancy, showing that the life of the loan is relatively shorter.
Another reason why older borrowers of a reverse mortgage qualify for more amounts is the high home equity at the time of application.
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How To Spot A Reverse Mortgage Scam
Below are some tips to avoid becoming a victim of reverse mortgage scams:
- Dont reply to unsolicited reverse mortgage offers by email or over the phone.
- Never give out confidential personal information over the phone or by email.
- Contact a HUD-approved counselor if youre not sure an offer is legitimate.
- Dont sign anything you dont understand.
How Much Will I Pay In Reverse Mortgage Costs
There are several reverse mortgage costs, that could include, but are not limited to:
- Loan origination fee up to $6,000
- An upfront mortgage insurance premium, which costs 2% of your homes value
- An annual mortgage insurance premium, which costs 0.5% of your homes value
- A reverse mortgage counseling fee, which could cost $125 or more
- A home appraisal and title search fee, among other closing costs
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Hecm Principal Limit Factor
The principal limit that you can borrow is the Maximum Claim Amount for your area multiplied by the youngest borrower’s age factor. This is actually the gross amount available for your loan, not the amount of money you can actually utilize.
The actual, final amount – called the Net Principal Limit – includes deductions for Mandatory Obligations, the amount of any required repairs to the home, and possibly a Life Expectancy Set-Aside from the proceeds. LESA is the amount of your equity reserved for paying certain future expenses.
Curious about take-outs and set-asides? The next article in Part 2 of this guide delves into the details.
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First Lets Review The Reverse Mortgage Basics:
A reverse mortgage loan is a type of loan that is insured by FHA and it allows older homeowners to access a portion of the equity in their home. One of the benefits of reverse mortgages is that there is no monthly payment due to the bank for as long as you live. However, if you move out permanently, the loan will be called due . That being said, since you still own the home you are obligated to pay and maintain your property taxes on time. Also, just like with any home loan, you are required to have homeowner insurance for the duration of the loan.
Which Program Should I Choose
There are a couple of different HECM programs to choose from, including fixed rate and adjustable lump sum distributions and monthly payments or lines of credits from which the borrower can draw as needed/desired.
What is right or best is what is right or best for the borrowers individual circumstances.
The fixed rate loan seems attractive to many borrowers but there are several downfalls borrowers must consider.
Namely, fixed rates require a full draw of all sums available. If you do not need all the money to pay off existing liens, HUD requirements on their program only allow a portion of the line to be accessed in the first 12 months and on a fixed rate loan with no subsequent draws available, any amount not available in the initial draw is lost to the borrower.
Also, since fixed rates are often higher than the adjustable rates and since interest rates are one of the determining factors as to how much money a borrower will receive, adjustable rate borrowers most often receive higher benefits in todays interest rate environment.
Finally, the adjustable program gives borrowers more options as to how they will receive their funds .
Borrowers who choose an adjustable rate loan have several options of how to receive their loan proceeds, including a line of credit, monthly payments, or even a lump sum.
The funds still in the line of credit grow annually at the same rate as the interest accrual rate plus the MIP accrual rate on the unused portion.