How Much Equity Do You Need for a Reverse Mortgage?

Reverse mortgages can provide income for eligible homeowners

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Reverse mortgages allow homeowners to convert their home equity into income for retirement. Proceeds from a reverse mortgage can be used for a range of purposes, from paying for day-to-day living expenses to funding home improvements.

Homeowners must qualify for a reverse mortgage by meeting specific requirements, including requirements for home equity levels. If you're considering getting a reverse mortgage, you’ll want to learn more about these equity requirements.

Key Takeaways

  • A reverse mortgage allows homeowners to convert their equity into income.
  • Home equity conversion mortgages (HECMs) are reverse mortgages backed by the federal government.
  • HECMs generally require at least 50% or more equity.
  • Getting a reverse mortgage can provide a steady income for retirement, but there are some risks.

Reverse Mortgages and Home Equity

A reverse mortgage is a financial arrangement that allows eligible homeowners to withdraw equity without having to make payments back to a lender during their lifetime, as long as they live in the home. Reverse mortgage balances, including accrued interest and fees, become due once the homeowner no longer uses the home as their primary residence.

The balance on a reverse mortgage rises over time since no payments are being made. In contrast, to a typical loan in which the balance declines as the homeowner makes payments. The homeowner is responsible for repaying the reverse mortgage, but they don't pay anything as long as they live in the home.

One of the qualifying conditions for getting a reverse mortgage is having home equity. Your equity is the difference between what your home is worth and what you owe on the mortgage. For example, say your home is valued at $500,000 and you owe $200,000 on the mortgage. Your equity would be $300,000.

$500,000 - $200,000 = $300,000

Lenders usually require a professional appraisal to determine a home's value for calculating equity for a reverse mortgage.

Equity Requirements for Reverse Mortgages

Different types of reverse mortgages have different equity requirements. A home equity conversion mortgage (HECM) is the most common type of reverse mortgage product. Administered through the Federal Housing Administration (FHA) and U.S. Department of Housing and Urban Development (HUD), HECMs are the only type of reverse mortgage backed by the federal government.

Equity requirements for HUD loans state that you must fully own the property outright or have paid a significant amount. Generally, reverse mortgages require at least 50% or more in home equity.

So if your home is worth $500,000 and you have $300,000 in equity, you'd have 60% equity in the property. You would be more likely to qualify for an HECM because you would have more than 50% equity.

($300,000 / $500,000) x 100 = 60%

Making home improvements or renovations could increase your home's value and, in turn, increase your equity.

Other HECM Qualifications

Aside from having sufficient equity in your home, you need to meet other conditions to qualify for an HECM. Under HUD rules, you must:

  • Be age 62 or older
  • Occupy the home as your primary residence
  • Not be delinquent on any federal debts, including student loans or taxes
  • Have financial resources to pay for homeowners insurance, property taxes, HOA fees if applicable, maintenance, repairs, and upkeep
  • Attend HUD-approved consumer credit counseling

You must complete credit counseling before you can even apply for an HECM. HUD prefers that you complete this counseling in person so you can better understand how a reverse mortgage works.

You must also live in an eligible property type. HUD approves these types of homes for HECMs:

  • Single-family homes or two- to four-unit homes with one unit occupied by the borrower
  • HUD-approved condominium project
  • Individual condominium units that meet FHA single unit approved requirements
  • Manufactured home that meets FHA requirements

The amount you can borrow with a reverse mortgage depends on your age, current interest rates, and how much equity you have in the home.

Like other FHA-administered loans, home equity conversion mortgages have both upfront and annual mortgage insurance premiums (MIPs).

Other Ways To Tap Your Home Equity

If you're unable to qualify for a reverse mortgage because you lack sufficient equity or don't meet other requirements, there are other options for tapping home equity. For example, you might consider:

  • Home equity loans: A home equity loan allows you to borrow a lump sum of money, based on the amount of equity you have. You then pay that amount back in fixed payments that include interest.
  • Home equity lines of credit (HELOCs): A home equity line of credit is a revolving credit line that you can draw against as needed. You only pay interest on the amount of the credit line you use. You can access the funds during the draw period, when you may be required to make interest payments, then you make full payments during the repayment period.
  • Cash-out refinances: Cash-out refinancing means taking out a new mortgage loan to pay off your current loan and withdrawing equity in cash. You'd then pay back the new loan according to the terms set by your lender. For example, if you have a Veterans Affairs (VA) loan, you could do a cash-out refi to get money to pay down debt or make home improvements.

Home equity loans, HELOCs, and cash-out refinancing can help you draw down your equity, but remember that your home serves as collateral. If you default on payments, you risk losing your home to foreclosure. So it's important to understand your budget to know what you can repay.

Frequently Asked Questions (FAQs)

How do you pay back a reverse mortgage?

Reverse mortgages can be repaid using cash assets or resources if the homeowner moves out. You can also sell the property and use the proceeds to pay off a reverse mortgage balance. If the homeowner passes away, their heirs can use financial resources such as life insurance or other assets from the deceased's estate to pay the balance. Otherwise, they'd likely have to sell the home and use those proceeds toward the loan.

What is the downside to a reverse mortgage?

The downside to a reverse mortgage is that it uses your home as collateral, so your home could be at risk of foreclosure if you don’t abide by the loan terms. Proceeds from a reverse mortgage do have to be repaid eventually, with interest and fees added. If you take out a reverse mortgage and don't leave any financial resources in place for your heirs to pay the balance when you pass away, they may be forced to sell the home.

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Article Sources

  1. Consumer Financial Protection Bureau. “What Is a Reverse Mortgage?

  2. U.S. Department of Housing and Urban Development. “HUD FHA Reverse Mortgage for Seniors (HECM).”

  3. U.S. Department of Housing and Urban Development. “How the HECM Program Works.”

  4. National Council on Aging. “A Guide to Reverse Mortgages for Older Adults.”

  5. Benefits.gov. “Cash-Out Refinance Loan.”