How Much Equity is Needed for a Reverse Mortgage? Find Out Here!
Reverse mortgages are becoming more popular every day as people look for ways to supplement their income in retirement. Keep reading if you’re curious about how much significant equity is needed for a reverse mortgage. In this blog, we will discuss the different factors determining how much money you can borrow with a reverse mortgage. We will also give you some tips on increasing your equity and improving your chances of getting approved for a reverse mortgage.
To qualify for a reverse mortgage and determine the maximum amount you may borrow, numerous factors come into play. For instance, lenders expect at least 50% equity in the property for HECMs.
How Much Equity Do You Need for a Reverse Mortgage?
What really determines the amount of money you can borrow with this loan is your age, the value of your home, and the current interest rate. Keep in mind that with a reverse mortgage, age is the most important variable because the older you are, the more money you can get. The next most important variable is the expected interest rate, this is the one lenders use to determine how much money they can lend you.
When it comes to the federally insured reverse mortgage or HECM, lenders use the expected interest rate and your age to calculate the amount of your loan. The lower the expected interest rate, the more money you can obtain.
As of 2023, there is a floor of 3% which means that if interest rates were to drop, the lowest expected interest rate lenders will use is the 3% floor. For example, an expected rate of 6% will give you more money than an expected rate of 6.5%. When it comes to the value of your home, in 2023 the Maximum Lending Limit is $1,089,300 so lenders will use the value of your home or the maximum lending limit, whichever is less, your age and the expected interest rate to determine the amount of your reverse mortgage loan.
Tips for Increasing Your Equity
There are various things you can do to increase your equity and your chances of getting approved for a reverse mortgage. Paying down your mortgage is one method; it will certainly enhance your equity and make acquiring it easier. Furthermore, making home repairs and upgrades can make a significant difference in your home value. Energy efficient homes tend to do better when they get appraised than homes who lack energy saving features.
Speak with us if you’re interested in a reverse mortgage; we will explain how the reverse mortgage works and how much money you can borrow. You can also utilize an online calculator to estimate how much money you can borrow with this loan.
There are several varieties of reverse mortgages to choose from
There are two types of reverse mortgage loan options available to homeowners: federally insured and proprietary.
What is a federally insured reverse mortgage loan? (HECM)
Federally insured reverse mortgage loans are called Home Equity Conversion Mortgages (HECMs). With this type of loan, you can access some of your home equity without having to make monthly mortgage payment. As we have discussed in several sections of my website, the only payments you are required to make are your property taxes and homeowners’ insurance (HOA dues if applicable). A HECM allows you to supplement your income and help you with your retirement by letting you access your equity through monthly payments to you, a lump sum, a growing line of credit or a combination of all three. You still retain title to your home and can pass it on to your heirs through a will or a living trust. All they need to do is payoff what you borrowed by either refinancing the loan or selling the home. What makes this loan unique is that it is insured by the Federal Housing Authority (FHA) and it guarantees that you continue to receive the loan proceeds for as long as you live in your home. Also, you or your estate will never owe more than what the house is worth.
What is a proprietary reverse mortgage loan?
A proprietary reverse mortgage loan is a private loan offered by private lenders, not by the federal government. As such, it can be tailored to meet the specific needs of the borrower. Typically, these loans are more expensive than HECMs and may have higher interest rates. Additionally, they are also a better fit for homeowners with higher home values. These loans are often referred to as “JUMBO Reverse Mortgages” and we can lend up to $4,000,000. They work exactly the same as a HECM but one key difference is that they can lend to people over the age of 55.
If you’re considering a reverse mortgage loan, it’s important to compare your options and choose the loan that best meets your needs. Federally insured reverse mortgages are backed by the federal government and are usually the best option for the majority of clients. Proprietary reverse mortgages are a great option if you are not 62 years of age and have a home that is worth over $1,500,000.
No matter which type of reverse mortgage loan you choose, it’s important to understand the loan terms and work with an experienced reverse mortgage lender.
HECM borrower requirements
Federal Housing Administration (FHA) sets a must-have requirement in obtaining approval for HECM:
- Must be at least 62 years old.
- Must own the home.
- The house must be the primary residence
- Must be able to pay property taxes and homeowners’ insurance. If you have difficulties keeping up with these type of payments, we can assist you establish a Life Expectancy Set Aside so you don’t have to worry about making them.
- Complete a counseling session with a Housing and Urban Development-approved HECM counselor
How a Reverse Mortgage Works
Reverse Mortgages have been around for many years and have earned a good reputation to be great estate planning tools because of the simplicity around them. Think of them as equity access plans where you can tap into your home equity, convert some of it into cash and choose a payment plan that suits your needs. Reverse mortgages offer many flexible options that you can customize them to make the most out of your retirement. For example, if you want to receive monthly payments for the rest of your life in order to supplement your monthly income, a reverse mortgage allows you to do that without having to report the monthly payments to the IRS. This is because the IRS considers those payments as a loan proceeds, not income. What if you want to payoff an existing mortgage? A reverse mortgage allows you to this too as long as there is enough money from the loan proceeds to pay it off. The benefit? You won’t have any more monthly mortgage payments and that means you’ll be increasing your monthly cash flow thanks to the reverse mortgage. What if my house is free and clear? This is where the Reverse Mortgage Growing Line of Credit comes to save the day. Think of it as your emergency fund that will grow over time when the money is not being used and you can access it at any time and for any amount up to what’s available to you. As you can see, reverse mortgages are an excellent way to plan for the future and have financial peace of mind.
What Is Home Equity?
Your home is likely your most valuable asset. This is especially true if you’re paying off a mortgage. But even if you have paid off your mortgage, the equity in your home can be used for other purposes, including putting a grandchild through college or taking a vacation.
Home equity is the difference between what your home is worth and what you owe on it. If you have $750,000 in estimated home value or equity and owe $500,000 on your mortgage, then your home equity is $250,000.
No Repayment Until Borrowers Pass Away or Move out of the House.
As we explained before, a reverse mortgage is not due until the borrower/s moves or pass away. At that time, heirs have up to 12 months to either sell the house or refinance the home. Please visit the Resources tab on my website for a complete guide on what to do when the reverse mortgage is due.
You Continue to Be Responsible for Property Taxes and Homeowners’ Insurance
The Bottom Line
If you’re considering a reverse mortgage, it’s important to understand where you are in life, what your needs and objectives are and above all, what retirement looks like for you. I can help you navigate through the process and explore what options are available to you based on that information. Have questions about reverse mortgages? I’d be happy to answer them – just give me a call!
