If you’ve paid your mortgage off or only have a small amount left to pay off, you may be eligible for a reverse mortgage. This program helps elderly homeowners that need more income. It’s a way to use the equity in your home while you are still here to enjoy it.
You don’t have to do something specific with the money – it’s your money to do as you see fit. Whether you need it for supplemental income for the daily cost of living or you want to splurge and take a luxurious vacation, the choice is yours.
Before you can take the reverse mortgage, you’ll need to meet certain criteria.
The Required Amount of Equity
Ideally, you will own your home free and clear before you apply for a reverse mortgage. If you don’t, you should have only a small mortgage outstanding. Any money you receive from the reverse mortgage will first pay off the outstanding mortgage balance before you can receive any money.
If you have a large mortgage balance on your home, the reverse mortgage won’t be of much help to you. Since the funds first must pay off the mortgage, you’d be left with little money in your hand. You may be better off with a cash-out refinance than a reverse mortgage in that case.
How Much Can You Borrow?
Most lenders allow you to take out as much as 80% of the home’s equity. The exact amount you can receive depends on your age and the value of your home. The older you are, the more equity you can usually take out of your home. The same is true for the value of your home – the higher the value of your home, the more money you have to take out of it.
By law, you must be at least 62-years old to use a reverse mortgage. If you apply for the mortgage with a spouse, the lender will use the age of the younger spouse for qualification purposes. The younger you are when you take the reverse mortgage, the less money you’ll receive. This is because at age 62 you have a longer life expectancy than someone does that is 80-years old. The risk becomes higher for the lender then because the money remains outstanding for a longer time.
How Does the Reverse Mortgage Work?
You can receive your reverse mortgage funds as a lump sum, line of credit, or monthly payments. Typically, the lump sum provides you with the lowest payout, since it’s the riskiest for the lender. Regardless of the amount of money you take out, you don’t make payments on the loan. Interest accrues, but it just adds to the balance owed on the mortgage.
If you remain in the home (as your primary residence) for the rest of your life, you’ll never have to pay off the reverse mortgage. Your beneficiaries will have to pay it off with the proceeds of the sale of the home. If you sell the home or move out and into a nursing home, you’ll have to pay the mortgage in full at that time.
With a reverse mortgage, you don’t have to worry about owing more than the home is worth. If at the time you sell your home you can only get a lesser amount than the outstanding mortgage, the lender will accept that amount as payment in full.
How much equity you need for a reverse mortgage really depends on your age and the value of your home. Reverse mortgage lenders will determine how much they will lend you based on these criteria. As is the case with any mortgage, make sure you shop around to get the loan with the lowest fees to maximize the money you receive.