Reverse Mortgage – 101

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What Is a Reverse Mortgage?

A reverse mortgage is essentially a loan. It allows you to access your home equity and turn it into cash. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds either as a lump sum payment up front, a fixed monthly payment or a line of credit. In general, homeowners who are over the age of 62 with 50-55% or more equity in their home have a good chance of qualifying for a reverse mortgage. Borrowers choose a reverse mortgage because it allows them to remain in their homes, as long as they meet the loan terms, and provides borrowers with funds that can greatly supplement their retirement income.

The entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home. Federal regulations require lenders to structure the transaction so the loan amount doesn’t exceed the home’s value and the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value.

How do I receive Payments?

When you take out a reverse mortgage, you can choose to receive the funds in the following ways:

  1. Lump sum up front: Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The others have adjustable interest rates.
  2. Equal monthly payments (annuity): As long as at least one of the borrowers lives in the reverse mortgaged residence the lender will make monthly payments to the borrower. This is exactly the reverse of when a borrower makes payments to the lender on a monthly basis.
  3. Term payments: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
  4. Equal monthly payments plus a line of credit: The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.

Reverse Mortgage Loan Limits

There are loan limits in place for reverse mortgages. For government-insured Home Equity Conversion Mortgage (HECM), the maximum reverse mortgage limit you can borrow against is $726,525 (Updated: Jan 1st, 2019), even if your home is appraised at a higher value than that.  

Who Is a Reverse Mortgage Good For?

Reverse mortgage loans have helped more than a million Americans across the country to access their home equity and find greater security in retirement. The reverse mortgage loan can be used in a number of ways, many of which are helping older adults achieve their financial goals and thus resulting in a much better retirement.

How a Reverse Mortgage Loan Works

With a traditional reverse mortgage loan, borrowers can access their home equity without having to pay principal and interest. It’s called a “reverse mortgage” because, unlike a traditional loan where the borrower makes payments to the lender, in this case the lender makes payments to the borrower. The loan is repaid when the last borrower or eligible non-borrowing spouse passes away or leaves the house.

  • The borrower remains the owner of the home and retains title.
  • The amount you can borrow depends on your age, property value, and interest rate. The older you are, the more equity you’ll have access to.
  • The borrower must continue to pay property taxes and homeowner’s insurance, and must keep the house in good repair.
  • As a non-recourse loan, the borrower will never owe more than the house is worth. If the loan balance exceeds the home’s value, the Federal Housing Administration will cover the difference.
  • There are different types of reverse mortgages and the funds can be disbursed in a number of ways.

In Summary – What are the criteria that determine Reverse Mortgage Payout

Reverse Mortgage payout amount is based on a formula that takes in to account the following key factors:

  • AGE – You must be at least 62 to qualify. And because part of this calculation is determined by the estimated length of the loan, the older you are when you take out a reverse mortgage, the more cash you will have access to.
  • HOME VALUE – Your home’s current appraised market value will help determine available loan proceeds. The higher the value, the higher the potential for cash.
  • INTEREST RATES – Current interest rates affect how much money you receive. The lower the interest rate, the higher your available funds.
  • FINANCIAL OBLIGATIONS – Fees and other financial obligations may also lower the amount you will receive. For example, if you have an existing mortgage balance left, it must be paid off first from your loan proceeds before you receive the rest.
  • DISTRIBUTION TYPE – Type of distribution – lump sum, partial sum, line of credit, monthly disbursement – can affect the loan amount. Line of credit option typically provides the highest possible proceeds, while the lump sum, the lowest.
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