A reverse mortgage is a financial product that allows homeowners ages 62 and older to borrow against the equity in their homes. The funds can be used for a single large expense or even as a source of income during retirement. And unlike other types of home equity financing, the funds don’t need to be repaid as long as the borrower remains in the home.
A reverse mortgage is a unique product that can be difficult to understand, especially when it comes to how much you can actually borrow. In this guide, learn a few factors that determine how much you can get from a reverse mortgage.
- The amount you can borrow with a reverse mortgage depends on several factors, starting with the value of your home and the amount of equity you’ve built up.
- Your interest rate and other fees can decrease the amount you can borrow since they are usually wrapped up in the loan.
- If you’re getting an FHA-insured reverse mortgage, you may be subject to certain loan limits in addition to those that align with your home’s value.
- There are several ways you can receive your reverse mortgage funds, including a lump sum, monthly payments, or line of credit. The method you choose may impact the amount you can borrow.
One of the most important factors that affects how much you can get from a reverse mortgage is the value of your home. Like other types of equity financing, a reverse mortgage doesn’t allow you to borrow more than your home’s value, since lenders want to know they’ll be able to recover the full loan amount. Generally speaking, the higher your home’s value and the more equity you have built up in it, the more you can borrow.
Your home’s value is used to calculate two important numbers:
- Maximum claim amount: This helps determine how much you can borrow and is based on your appraised home value or the maximum amount HUD will insure.
- Principal limit: This amount is the total you can borrow with a reverse mortgage, based on your maximum claim amount and several other factors.
Reverse Mortgage Loan-to-Value Ratio
Your loan-to-value ratio (LTV) is the percentage of your home’s value that you can borrow. Each lender sets a maximum LTV for reverse mortgages, which is the maximum percentage of your home’s value that you can borrow.
The amount of equity you currently have in your home affects your LTV. If you have a mortgage or HELOC on the home, you’ll be able to borrow less with your reverse mortgage. To qualify for a reverse mortgage, you generally must have at least 50% equity in your home.
Another factor that affects the amount you can borrow is your interest rate. When you borrow a reverse mortgage, you won’t pay it back right away. As a result, interest accrues over time as the balance grows. In general, the higher your reverse mortgage interest rate, the lower the amount you can borrow.
Most reverse mortgages have variable interest rates, meaning the rate can change over time based on the movement of a particular market index. Some reverse mortgages offer fixed interest rates, although they tend to be higher than variable rates.
Most reverse mortgage lenders disclose their current rates on their websites. If you’re considering a reverse mortgage, you can easily see the fixed and variable rates currently available.
Taxes, Fees, and Other Costs
Along with the principal and interest on your reverse mortgage, you’ll be responsible for other fees. For example, lenders usually charge closing costs, origination fees, and service fees on reverse mortgages. You may also be required to pay a mortgage insurance premium, especially for federally-insured loans. In addition, you may incur other third-party fees, including appraisals, title searches, mortgage taxes, and more.
In many cases, homeowners decide to finance these additional fees into their loan amount. The benefit of going this route is you won’t have to pay for those expenses out of pocket. The downside is that by financing these added costs, you’ll reduce the amount available for you to borrow.
Extra Requirements for FHA Reverse Mortgages
A home equity conversion mortgage (HECM) is a common type of reverse mortgage, and the only one insured through the Federal Housing Administration (FHA). Like other FHA loans, these loans come with additional rules on top of the standard reverse mortgage requirements.
The maximum amount you can borrow with an FHA-insured HECM in 2022 is $970,800, up from $822,375 the year before. Unlike other types of FHA loans, the maximum limit doesn’t vary depending on where you live.
How You Receive Reverse Mortgage Money
There are three primary ways you can choose to receive the money from your reverse mortgage. The method you choose could affect the amount you’re able to receive.
You can choose to receive your reverse mortgage funds in one lump sum. This option may be most appropriate if you’re using the money to pay for a large expense, such as paying off your mortgage or covering the cost of home renovations. The amount you can borrow from a lump sum may be lower than other payment methods.
For an HECM, you can only receive a lump-sum payment if you choose a fixed interest rate. In fact, this is the only payment method available for fixed-rate reverse mortgages.
When you opt to receive your reverse mortgage funds in the form of monthly payments, you will have two options:
- Term payment plan: Monthly payments for a specified number of years
- Tenure payment plan: Monthly payments for as long as you remain in the home and have equity available to borrow
Monthly payments usually enable you to borrow more money because they cost less. You’re getting the money over a longer period than you would the lump-sum option, so instead of paying interest and fees on the full amount from the start, you’ll only pay interest and fees on the amount you’ve received so far.
Line of Credit
Like other lines of credit, a reverse mortgage line of credit lets you borrow only as much as you need at any given time, up to your credit limit. Like the monthly payment option, the line of credit has lower costs since you aren’t generally borrowing the full amount right away.
Rather than choosing just one payment method, you can often combine the monthly payment and line of credit. If you choose that option, you’ll receive set monthly payments, as well as have access to a line of credit.
Frequently Asked Questions (FAQs)
How much equity do you need to qualify for a reverse mortgage?
You usually need at least 50% home equity to qualify for a reverse mortgage. The exact amount will depend on the lender you choose.
What is the downside to a reverse mortgage?
There are several downsides to reverse mortgages, including the fees associated with them; the fact that most have variable interest rates that can change over time; and that the interest you will pay isn’t tax-deductible, as it can be with other forms of equity financing. Taking out a reverse mortgage may also mean you can’t leave your home to your loved ones when you pass away, since they may have to sell the home to repay the loan.
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