Is A Reverse Mortgage Right For Me
A reverse mortgage is a complex financial product and you should carefully consider whether it is right for you. When considering whether to apply for a reverse mortgage, you should consider, among other things, whether:
- you want to remain in your home
- you are healthy enough to continue living in your home
- other alternatives, such as selling your home and purchasing a smaller, less expensive home, would be better for you
- your children, or other heirs, want to inherit the home
- the loan proceeds will be enough, with any other source of income you have, will be enough to enable you to live in your home
This is not an exclusive list of topics to consider, and everyones situation is unique. It is important for you to weigh whether a reverse mortgage is right for your situation and, you should consult with a legal or financial advisor or a housing counselor to help you assess your options.
A list of New York non-profit housing counseling agencies is available.
What Is The Maximum Amount You Can Borrow With A Reverse Mortgage
A reverse mortgage is a type of loan typically used by senior and retired borrowers who choose to borrow money against their home’s equity. Typically you have to refinance your home loan to access the equity on your home, which means taking out a new full-length home loan. A reverse mortgage offers you access to the equity in your home even if youve repaid the loan in full.
Reverse mortgages can help retirees with reduced income to increase liquidity or acquire assets. You remain in your home and are not required to make any payments when you are there. The interest on your loan increases over time, so it grows larger and adds to the total amount you owe. When you or your deceased estate sell your property, you repay the loan in full, including interest and fees. Its commonly used to help retirees with the finances needed to move into an assisted living facility. Once the move is complete, the property can be sold, and the mortgage can be repaid.
Though the process seems straightforward and applicable to everyone, it has specific rules. The loan amount maximum for a reverse mortgage depends on two prime factors: the borrowers age and the present-day valuation of the property.
When Does A Reverse Mortgage Make Sense
| Homeowner’s Story | Tom, 70, and Barbara, 68, enjoy a comfortable lifestyle and have substantial retirement savings. However, they’d like to travel more and spend more without worrying about outliving their funds. They own their home free and clear, and it’s currently worth $700,000. |
| Homeowner’s Reverse Mortgage Decision | They choose a HECM line of credit, which requires no annual mortgage insurance as long as it goes unused. The line can grow over time, ready to provide cash if they deplete their retirement savings. This loan provides peace of mind for the couple, allowing them to enjoy their retirement and worry less about overspending. |
| Home Value |
* Any property value greater than $625,500 is calculated at the HECM maximum value.
** If unused, HECM credit lines grow at the loan’s variable interest rate.
Now let’s look at an example where the reverse mortgage choice is not so clear.
* Elimore’s property may be worth $300,000, but it’s subject to a $80,000 loan.
** If unused, HECM credit lines grow at the loan’s variable interest rate.
Now let’s look at a situation where the homeowners are house-rich and cash-poor.
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How Much Can You Get From A Reverse Mortgage
In 2015, A new FHA rule was created. The rule limits how much money you can access in the first year of your loan.
With a reverse mortgage, all existing home loans and liens must be paid off. The rule allows you to access only 60% of your Principal Limit in year one to pay all your liens, and you may also have an additional 10% in cash, if you may wish to, so long as the total is less than the Principal Limit.
Example #1:
A 62-year old homeowner has a $650,000 home thats paid off. The solution below shows how much money he can get in year one.
Principal Limit = MCA x PLF
= $650,000 x 52.4%
Proceeds Year 1 = Principal Limit x 60%
= $340,600 x 60%
= $204,360
The 60% rule limits the borrower to borrow an amount of $188,640 in year one. The remaining proceeds will be accessed by the borrower at the beginning of year two:
ProceedsYear 2 = Principal Limit Proceeds Year 1
= $340,600 $204,360
=$136,240
Example #2:
A 62 year old owns a $650,000 home with a $200,000 mortgage. He can access $200,000 to pay off the mortgage, plus 10% of his Principal Limit. Therefore, he can get $234,060 at closing.
Principal Limit = MCA x PLF
= $650,000 x 52.4%
ProceedsYear 1 = Mortgage +
= $200,000 +
The remaining amount can be accessed by the borrower at the beginning of year two:
ProceedsYear 2 = Principal Limit Proceeds Year 1
= $340,600 $234,060
=$106,540
About the Author, Jason
Do I Have Enough Equity For A Reverse Mortgage
What youre eligible for will depend on your circumstances and reverse mortgage terms. For example, if youre younger and the sole titleholder, youll need more equity to qualify. In the first example above where the homeowner owns a $400,000 home outright a 62-year-old borrower would only receive a $176,360 lump sum.
The payment type you select will also affect your loan amount. In many cases, you may receive more with a monthly payment or credit line option than with a single disbursement.
A reverse mortgage calculator can estimate your payout however, a HECM counselor approved by the U.S. Department of Housing and Urban Development and reputable reverse mortgage lenders will provide more accurate figures based on your financial situation.
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Can I Get A Fixed Interest Rate On A Reverse Mortgage
Yes, borrowers can get a fixed rate. However, you will have to choose a lump-sum distribution of proceeds.
About the Author
Gina Pogol writes about mortgages and personal finance for several national publications. Pogol is a licensed Nevada mortgage lender with more than 20 years of experience. Gina is a well-rounded business professional with experience as an estate planning and bankruptcy paralegal, a systems consultant for Experian and a tax accountant with Deloitte. She loves teaching and empowering consumers.
How To Get Out Of A Reverse Mortgage
There are many ways to get out of a reverse mortgage. If youre within three days of closing, you can exercise your right of rescission and cancel your loan. Youll need to do this in writing, but once received, your lender has 20 days to refund your costs and fees.
If youre past this window, you can pay off your reverse mortgage balance at any time, but your costs and fees will not be refunded. You can do this using cash, retirement savings or by selling your house.
You could also refinance either into a new reverse mortgage with better terms or into a conventional loan, which you could use to pay off the reverse mortgage balance. Just remember, this would mean making monthly payments again.
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How To Refinance Your Mortgage
Considering refinancing? We highly recommend speaking with an advisor who can review your financial picture and help determine if refinancing is the right financial move for you. In the meantime, here are the steps to refinancing your mortgage:
1. Understand why you want to refinance.
Is refinancing the right option for you? Take a look at our list of some of the benefits and considerations to determine if itâs the best way to reach your goals.
2. Figure out your timing.
Is it worth breaking your current mortgage early or can you wait until itâs time to renew? If you can wait until the end of your mortgage term, there will be no penalties for breaking your mortgage early. If you need to break the mortgage during its term, be sure you understand the costs involved.
3. Determine what you want to replace your current mortgage with
RBC Homeline Plan
The RBC Homeline Plan combines your RBC Mortgage and Royal Credit Line into one product that allows you to access the equity you have in your home. And, it gives you the flexibility to use funds in a way that best suits your needs. Learn more about the benefits of an RBC Homeline Plan.
Blend and extend your current mortgage
RBC can offer you a blended rate on your mortgage, which is essentially a blend of your current mortgage rate plus any additional money you borrow at current market rates.
4. Connect with an RBC Financial Advisor
Understanding Reverse Mortgage And Home Equity Basics
A reverse mortgage provides senior homeowners with access to their home equity. Instead of making payments that decrease the loan balance as with a traditional mortgage reverse mortgage loan borrowers receive payments from the equity in their home.
Over time, the mortgage balance grows, and home equity decreases. The loan becomes due when the borrower no longer lives in the house.
The most common type of reverse mortgage is the home equity conversion mortgage , which the federal government insures.
The amount of equity required to qualify for a reverse mortgage and how much you can borrow will depend on various factors. For HECMs, lenders will typically look for at least 50% equity in the home. Additionally, theyll consider the following when determining how much you can take out:
- Home value
| Estimated lump sum payment | $0 |
In this scenario, the borrower only has 44% equity in their home, and therefore wouldnt qualify for a reverse mortgage.
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Borrowing From Home Equity With Reverse Mortgage Loans
Fortunately, there is a third option that does not require a monthly mortgage payment. Government insured reverse mortgages, also known as an equity home release or a Home Equity Conversion Mortgage , are quickly becoming the top choice for equity-rich senior homeowners interested in taking equity out of their home.
Reverse mortgages are loans that allow you to borrow against home equity without being required to pay a monthly mortgage payment. Borrowers remain responsible for paying property taxes, homeowners insurance, and for home maintenance. Instead, some of the equity in your home is first used to pay off any existing mortgages, and the remaining loan amount is converted to non-taxed cash that you may receive in a lump sum, a monthly disbursement, or a line of credit. Meanwhile, you may continue to live in the comfort of your home. The loan becomes due and payable if the borrower moves away, passes, or fails to comply with loan terms such as neglecting to pay taxes and insurance.
What Is A Reverse Mortgage
A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. This is sometimes called equity release. You can borrow up to 55% of the current value of your home.
The maximum amount youre able to borrow will depends on:
- your age
- your homes appraised value
- your lender
You pay back your loan when you move out of your home, sell it or the last borrower dies. This means you dont need to make any payments on a reverse mortgage until the loan is due. You will owe more interest on a reverse mortgage the longer you go without making payments. At the end of your loan term, you may have less equity in your home.
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How Do I Determine My Equity
Equity is determined by the current appraised value of your home minus the amount that you owe on the house. Since home values vary based on market conditions, your equity can increase or decrease based on the appraised value of your home. In a period of high housing values, your equity will increase despite your payments staying the same. Conversely, in a housing crash, your equity may go down as your investmentyour homeloses value.
Do This To Avoid Foreclosure From A Reverse Mortgage
Another danger associated with a reverse mortgage is the possibility of foreclosure. Even though the borrower isnt responsible for making any mortgage paymentsand therefore cant become delinquent on thema reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions allows the lender to foreclose.
As a reverse mortgage borrower, you are required to live in the home and maintain it. If the home falls into disrepair, it wont be worth fair market value when its time to sell, and the lender wont be able to recoup the full amount that it has extended to the borrower.
Reverse mortgage borrowers are also required to stay current on property taxes and homeowners insurance. Again, the lender imposes these requirements to protect its interest in the home. If you dont pay your property taxes, then your local tax authority can seize the house. If you dont have homeowners insurance and theres a house fire, the lenders collateral is damaged.
About one in five reverse mortgage foreclosures from 2009 through 2017 was caused by the borrowers failure to pay property taxes or insurance, according to an analysis by Reverse Mortgage Insight.
| Reverse Mortgage Interest Rates for HECMs |
|---|
| Month |
There are some exceptions to these rules for eligible non-borrowing spouses who want to keep living in the home after their borrowing spouse passes away.
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Reverse Mortgage Age Requirements For 2022
If you meet the reverse mortgage age requirement of 62 years, you could be a candidate for the federally-insured Home Equity Conversion Mortgage program. The loan can enable you to remain in your home longer and does not need to be repaid for as long as you maintain principal residency in your home and keep up with property taxes and insurance.
Because the length of the loan depends directly on how long you live in the home, the amount you can borrow also depends on that time frame, including the age at which you get the reverse mortgage. Reverse mortgage proceeds can be accessed in a few different waysas a line of credit, as monthly term or tenure payments, as a lump sum, or some combination of those optionsand can be used in whatever way youd like for groceries, medication, or even utility bills.
Borrowers must pay an upfront mortgage insurance premium along with annual mortgage insurance of 0.5% of the outstanding loan balance annually.
Reverse Mortgage Problems For Heirs
Inheriting a home with a reverse mortgage attached to it can be challenging. Heirs must decide whether to pay off the reverse mortgage out of pocket and keep the property or sell the home and use the sale proceeds to repay the balance.
Fortunately, if they do sell the home, they won’t ever owe more than the homes worth . In the event the home sells for less than the total reverse mortgage balance that’s due, FHA mortgage insurance will cover the difference.
How long do heirs have to pay off a reverse mortgage?
Heirs typically have 30 days to pay off the loan balance. In some cases, you may be able to request an extension of up to a year. A lender might grant this if youre actively trying to sell the home or youre working on obtaining financing . This information mainly applies to federally backed loans, though lenders may make exceptions for proprietary mortgages too.
If the heirs do not pay back the loan within the agreed-upon timeframe, the lender may foreclose on the home.
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What Are The Costs Of A Reverse Mortgage
HUD adjusted insurance premiums for reverse mortgages in October 2017. Since lenders cant ask homeowners or their heirs to pay up if the loan balance grows larger than the homes value, the insurance premiums provide a pool of funds that lenders can draw on so that they dont lose money when this happens.
One change was an increase in the up-front premium, from 0.5% to 2.0%, for three out of four borrowers and a decrease in the up-front premium, from 2.5% to 2.0%, for the other one out of four borrowers. The up-front premium used to be tied to how much borrowers took out in the first year, with homeowners who took out the mostbecause they needed to pay off an existing mortgagepaying the higher rate. Now, all borrowers pay the same 2.0% rate. The up-front premium is calculated based on the homes value, so for every $100,000 in appraised value, you pay $2,000. Thats $6,000 on a $300,000 house, for example. In fact, the fee is capped at $6,000, even if your home is worth more.
All borrowers must also pay annual MIPs of 0.5% of the amount borrowed. This change saves borrowers $750 a year for every $100,000 borrowed and helps offset the higher up-front premium. It also means that the borrowers debt grows more slowly, preserving more of the homeowners equity over time, providing a source of funds later in life, and increasing the possibility of being able to pass down the home to heirs.
How Much Money Can I Get With A Reverse Mortgage Loan And What Are My Payment Options
How much you can borrow depends on your age, the interest rate you get on your loan, and the value of your home. You have three main options for receiving your money: through a line of credit, monthly payout, or lump sum payout.
Your borrowing limit is called the “principal limit.” It takes into account your age, the interest rate on your loan, and the value of your home. In general, loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates. If you are married or co-borrowing with another person, the principal limit is based on the age of the youngest co-borrower, or Eligible Non-Borrowing Spouse.
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