Home Equity is an underutilized asset that many senior homeowners can benefit from using as part of their overall financial plan. A reverse mortgage is one tool to help you do just that. In fact, I work with many other professionals, including Attorneys, Financial Planners, Accountants, Contractors, and In Home Care Providers. We are often able to help their clients use a reverse mortgage to better their situation in retirement. A reverse mortgage is not always the right financial tool for someone, but when it is the right tool it can be quite transformational and life-changing.
A reverse mortgage is a home equity loan program for homeowners age 62 and up. It works by allowing senior homeowners to borrow a portion of their home's value with no monthly mortgage payments. The money received is non-taxable and can be used as the borrower wishes. Borrowers remain the owners of their home just like a conventional or traditional mortgage.
A reverse mortgage is a great tool for those looking to supplement their income in retirement. Many use it for home repairs, paying off an existing mortgage, cash flow instead of liquidating investments, daily expenses, grandchildren, and for an accessible nest egg that they don't currently have. Money from the reverse mortgage can be taken in a lump sum, monthly payments, or in a credit line.
A reverse mortgage borrower can pay off a reverse mortgage at any time, just like a conventional mortgage. There are no prepayment penalties with a reverse mortgage. You can pay the lender directly or you can sell your home and the loan will be paid off through escrow. All equity in the home is yours.
When considering a reverse mortgage, it is important to take a look at your future plans. What are your plans for the upcoming years and do you see yourself living in this home long term? If you plan on moving in the next few years then it might be better to hold off on getting a reverse mortgage until you are in your new home. You can even consider purchasing a new home with a reverse mortgage by using a Reverse Mortgage For Purchase.
How much money you get from a reverse mortgage depends on a few factors. It is based on your age, your home's value, the interest rate, and the program chosen.
Typically, homeowners will receive from 40%to 65% of their home's value or the FHA lending limit.
As of 1/1/2023 FHA's reverse mortgage (HECM) lending limit is $1,072,500. Proprietary/Jumbo reverse mortgage lending limits are as high as $4,000,000. Calculations use the lending limit or the value of your home, whichever is lower.
There are some requirements to qualify for a reverse mortgage.
The equity you need to get a reverse mortgage depends on your age, the interest rate offered, and your home's value.
Typically, homeowners will need 60% to 35% equity in their home.
Reverse mortgages have protections in place in the event a reverse mortgage borrower dies. When the last surviving borrower passes away the heirs or beneficiaries will be given sufficient time to decide how to handle the property. Unlike a traditional loan, no mortgage payments are required during this time. No other mortgage gives this type of protection and assurance to the heirs of a mortgage borrower.
If the heirs want to keep the home they can pay off the balance with cash or by refinancing the home.
Most heirs sell the home and the remaining equity in the home goes to them. The mortgage lender only collects what is owed on the loan.
If for some reason the loan balance is higher than the value of the home then the heirs can walk away from the home without recourse or penalty. This is guaranteed by the non-recourse provisions of the reverse mortgage. Also, in this situation on a HECM reverse mortgage, the FHA mortgage insurance also allows heirs to purchase the home at 95% of the appraised value.