How Do You Qualify For A Reverse Mortgage
The main requirement is you must be 62 years old. If your spouse is not that old, he or she cannot be on the title.
The property must be your primary residence. You have to go through consumer counseling so the government will know you at least theoretically understand the obligations youre getting into.
You must have a lot of equity in your home. The exact figure depends on the lender, but it is almost always higher than 50%.
Lenders might look at other factors that come into play when you get a traditional loan, like your credit score and debt-to-income ratio . But the DTI is not typically considered in the qualification.
Neither is your credit score if you are getting a HECM loan, though if you have any outstanding debts like federal student loans you will not be approved.
The Veterans Administration doesnt offer reverse mortgages. But you can use the VA to get a traditional loan to pay off a reverse mortgage.
Benefits Of Refinancing A Reverse Mortgage
For some borrowers, the most compelling reasons to refinance a reverse mortgage are lowering interest rates or switching from a variable rate to a fixed rate. If you borrowed when rates were high and interest rates have gone down significantly, this might also make refinancing worth it. Carefully consider how much you or your heirs will save over time versus the closing costs and fees associated with the new reverse mortgage.
Another reason to refinance a reverse mortgage is if your home has appreciated in value, making you eligible for a higher loan limit. Since a reverse mortgage is not taxed, this could be a way to take advantage of increased equity.
Other borrowers might consider reverse mortgage refinancing if they need to add a spouse to the loan to ensure he or she can remain in the home if the borrower passes away or moves into a nursing home.
What Are The Costs Of A Reverse Mortgage
Home equity conversion mortgages, the most common type of reverse mortgage, bring a number of fees and costs. To start with, all borrowers taking out a HECM reverse mortgage loan must undergo counseling, which the borrower pays for, from a HUD-approved reverse mortgage counselor. Costs for this counseling will vary. Other fees include origination fees, closing costs, and mortgage insurance premiums, as well as servicing fees to the lender for such costs as sending account statements, distributing loan proceeds, and making certain that you keep up with the loan requirements.
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Reverse Mortgages: The Good And The Bad
By Family Caregiver Alliance Kathy, age 59, hates to see her mother Betty struggle with financial constraints. Since Bettyâs husband passed away five years ago, her household income has been cut in half. Kathy sees her mother struggling to pay for utilities, medication, food and other household expenses on her reduced income. While Kathy helps as much as she can, she has her own family and career to manage.
Kathy is now helping her mother investigate the benefits and risks of a reverse mortgage to provide additional income. Reverse Mortgages were originally designed as a âlast resortâ type of loan to provide additional cash flow for seniors aged 62 and older who owned their own home. However, reverse mortgages have become increasingly popular with younger seniors using the cash to subsidize retirement income or to help pay for long-term care expenses. According to AARP, about fifty percent of the people applying for reverse mortgages in todayâs market are under the age of 70.
The Benefits: For a senior like Betty, a reverse mortgage could provide cash flow from the bank, based on the equity in her home either as a lump sum or line of credit. As long has she remains in the home, no payment is due on the loan and the additional cash can be used as needed. As part of receiving the loan, Betty will need to continue paying her property taxes and house insurance, and has to keep the house in good shape.
Cons Of A Reverse Mortgage
These loans arent for everyone. They come with several drawbacks that you might want to consider before you get one:
- Reverse mortgages decrease the amount of equity you have in your home.
- Your loan balance will increase if you dont pay down your interest over time.
- You may outlive your loans benefits if you dont choose to receive monthly payments throughout the life of the loan.
- A reverse mortgage can make it more difficult for your heirs to benefit from the equity in your home after you pass away.
You should also be aware that, as with many loans, there are many reverse mortgage scams. Make sure you verify your loan and beware of contractors who suggest loans to pay for home repairs or programs that target veterans. The Department of Veteran Affairs does not sponsor any reverse mortgage loans.
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Times A Reverse Mortgage Is A Good Idea
Its funny when you hear someone with a definite opinion, one way or the other about reverse mortgages that is the same no matter who youre talking about or what the circumstances are.
The choice of whether or not to get this loan isnt universally a good ideaorbad decision there are a lot of different factors that need to be considered.
But it just could be the right choice for you!
Who Is A Good Candidate For A Reverse Mortgage
With all the potential complexities and risk of putting your home on the line, is a reverse mortgage actually a good idea? For some homeowners, the answer might be yes:
- If you anticipate staying in your home for a long time Since youll pay another set of closing costs with a reverse mortgage, you need to stay in the home long enough to justify the expense. So, if youre 62, have a history of longevity and believe your current place is your forever home, a reverse mortgage could make sense. Plus, if you live in a market where home values are appreciating at a fast clip , your property may be worth plenty more by the time you or your heirs pay back the loan.
- If you need more money to manage everyday expenses If youve found yourself struggling to manage the expenses of retirement, a reverse mortgage can help give you liquid cash to help deal with those responsibilities.
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How Your Age Affects The Amount Available
You must be at least 62 years of age for a reverse mortgage. The Principal Limit of the loan is determined based on the age of the youngest borrower because the program uses actuarial tables to determine how long borrowers are likely to continue to accrue interest.
If there are multiple borrowers, the age of the youngest borrower will lower the amount available because the terms allow all borrowers to live in the home for the rest of their lives without having to make a payment.
Of course there will always be exceptions, but the premise is that a 62-year-old borrower will be able to accrue a lot more interest over his or her life than an 82-year-old borrower with the same terms. Therefore, HUD allows the 82-year-old borrower to start with a higher Principal Limit.
You Have To Pay For It
Reverse mortgages have costs that include lender fees , FHA insurance charges and closing costs. These costs can be added to the loan balance however, that means the borrower would have more debt and less equity. Youll also be paying pesky servicing fees each month that can be as high as $35 if your interest rate adjusts on a monthly basis.
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Putting A Reverse Mortgage To Use
Ms. Fox said her reverse mortgage was one part of an overall financial plan. She lives on required minimum distributions from her individual retirement account as well as income from maturing bonds in a taxable account, Social Security, and a survivor benefit from her husband Davids corporate pension.
When she opened the reverse mortgage, she was eligible to borrow $370,000, most of which still sits unused in her line of credit. At this point, she owes $81,000, which includes the money she drew from the line of credit for expenses and accrued interest. Because the yet-untapped funds in the line of credit earn interest, her available borrowing limit the size of her line of credit is now $329,000, she said.
If she needed extra cash, Ms. Fox said she would rather take tax-free funds from her reverse mortgage than pay income tax on additional withdrawals from her I.R.A. or capital gains tax on stock sales in her taxable account.
The HECM also will provide flexibility when she must pay the entrance fee to the continuing care retirement community she plans to move into in several years. She could use the proceeds from the sale of a home she co-owns in California, along with the HECM money. She could sell the townhome when market conditions are right and pay off the loan balance then.
I want the ability to move without having to depend on the immediate sale of the townhome, she said. It stresses me out when I think of it.
Reverse Mortgage Interest Rates
Only the lump sum reverse mortgage, which gives you all of the proceeds at once when your loan closes, has a fixed interest rate. The other five options have adjustable interest rates, which makes sense since youre borrowing money over many years, not all at once, and interest rates are always changing. Variable-rate reverse mortgages are tied to the London Interbank Offered Rate .
In addition to one of the base rates, the lender adds a margin of one to three percentage points. So if the LIBOR is 2.5% and the lenders margin is 2%, then your reverse mortgage interest rate will be 4.5%. As of January 2020, lenders margins ranged from 1.5% to 2.5%. Interest compounds over the life of the reverse mortgage, and your does not affect your reverse mortgage rate or your ability to qualify.
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How Much Can You Borrow
The amount you can borrow depends mostly on the age of the youngest borrower and how much equity you have in the home. Current mortgage rates and your other financial obligations, including any current mortgage, are also factors.
For a government-backed reverse mortgage , the loan limit is equal to the conforming loan limit for a single family home in a high-cost area. In 2021, that limit is $822,375. Loan limits for government-backed reverse mortgages do not vary from one county to another.
Home Equity Conversion Mortgages
Also known as HECMs, these loans are designed for homeowners 62 and older and are insured by the federal government. A key feature of the HECM is that it abides by the Federal Housing Administrations loan limit, which was set at $970,800 for 2022. This means that homeowners with homes valued above this number cannot access more cash. HECMs were established in 1989 and are the most commonly used reverse mortgage.
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Types Of Reverse Mortgages
There are three types of reverse mortgages. The most common is the home equity conversion mortgage . The HECM represents almost all of the reverse mortgages that lenders offer on home values below $765,600 and is the type that youre most likely to get, so thats the type that this article will discuss. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.
When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:
How To Repay The Money You Borrow
You don’t need to make any regular payments on a reverse mortgage. You have the option to repay the principal and interest in full at any time. However, you may have to pay a fee to pay off your reverse mortgage early.
You have to repay the amount left owing when:
- you sell your home
- you default on the loan
You could default on a reverse mortgage by:
- using the money from the reverse mortgage for anything that is illegal
- being dishonest in your reverse mortgage application
- letting your home fall into a state of disrepair that would lower its value
- not following any conditions in your reverse mortgage contract
Each reverse mortgage lender may have their own definition of defaulting on a reverse mortgage. Ask your lender what could cause you to default.
When you die, your estate has to repay the entire amount owing. If multiple individuals own the home, the loan has to be repaid when the last one dies or sells your home.
The amount of time that you or your estate has to repay a reverse mortgage may vary. For example, if you die then your estate may have 180 days to pay back the mortgage. However, if you move into long-term care, then you might have one year to pay it back. Make sure you ask your lender for information about the timing for paying back a reverse mortgage.
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How To Determine The Amount Of Money You Can Get From A Reverse Mortgage
A reverse mortgage calculator can be a great way to get a solid estimate of how much money you can get from a reverse mortgage. Depending on the type of reverse mortgage you choose, you may be able to access up to 60% of your homes equity.
The actual amount of money youll receive from a reverse mortgage is based on the age of the youngest borrower, the amount of equity you have in the home and the current interest rate. If you have a HECM, you may also be restricted by loan limits, depending on the appraised value of the home. If you have an existing mortgage, you may want to subtract that amount from your total, since the lender will use that money to pay your mortgage off first.
You may also want to factor in closing costs if youd like to use some of your proceeds to pay those off, though they can be rolled into the loan balance.
To get a more accurate estimate that takes your specific lifestyle and financial goals into consideration, call a reverse mortgage specialist.
How Much Money Can I Get From A Reverse Mortgage
The proceeds from a reverse mortgage are calculated based on the following factors:
- The age of the youngest borrower
- The lesser of the appraised value of the property or the Federal Housing Administrations maximum claim amount of $725,650
- The balance of any existing liens against the property
- Current interest rates
These factors are calculated to determine the amount of proceeds available through the loan, what is known as the principal limit. An online reverse mortgage calculator can help you determine your principal limit.
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How Much A Reverse Mortgage Can Cost
Costs associated with a reverse mortgage may include:
- a higher interest rate than for a traditional mortgage
- a home appraisal fee
- a prepayment penalty if you pay off your reverse mortgage before it is due
- legal fees for closing costs or independent legal advice
The costs will vary depending on your lender. Some fees may be added to the balance of your loan. You may have to pay for others up front.
Pros And Cons Of A Reverse Mortgage
Once youre 62 or older, a reverse mortgage can be a good way to get cash when your home equity is your biggest asset and you dont have another way to get enough money to meet your basic living expenses. A reverse mortgage allows you to keep living in your home as long as you keep up with property taxes, maintenance, and insurance and dont need to move into a nursing home or assisted living facility for more than a year.
However, taking out a reverse mortgage means spending a significant amount of the equity that youve accumulated on interest and loan fees, which we will discuss below. It also means that you likely wont be able to pass down your home to your heirs. If a reverse mortgage provides a short-term solution to your financial problems rather than a long-term one, then it may not be worth the sacrifice.
What if someone else, such as a friend, relative or roommate, lives with you? If you get a reverse mortgage, that person wont have any right to keep living in the home after you pass away.
Another problem that some borrowers run into with reverse mortgages is outliving the mortgage proceeds. If you pick a payment plan that doesnt provide a lifetime income, such as a lump sum or a term plan, or if you take out a line of credit and use it all up, you might not have any money left when you need it.
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