Homeowners across the west coast have been asking how they can maximize their home equity options, and reverse mortgages are becoming a popular topic. For the first time in a decade, many homeowners have more than 20% home equity. What’s more, while many have relocated over this past year, most homeowners over the age of 60 are staying put.
So when does a reverse mortgage make good financial sense? Is a reverse mortgage a good idea for older homeowners who have a lot of home equity? This post answers the top questions I hear from clients who are considering a reverse mortgage.
If you or a family member is a homeowner over the age of 62, you may have considered a reverse mortgage. A reverse mortgage can provide financial stability and the ability to stay in your home during the later years of life.
Reverse Mortgages: Know the Benefits
A reverse mortgage is similar to refinancing a traditional mortgage and getting cash out. Your home is the collateral for the new loan, you are still the homeowner, and the title stays in your name.
The big difference: you don’t have to make monthly mortgage payments. At first glance, this doesn’t make sense, so let’s give an example.
Here’s a common scenario: you bought your home several years ago, and you’ve been making monthly mortgage payments on time for a 30-year fixed-rate mortgage. Now, you’re 62 and your mortgage balance is $75k. However, the value of your home has increased since you bought it several years ago, and it’s now worth $700k.
In this example, you can apply for a reverse mortgage to borrow against your home equity ($625k). With your new mortgage, you can decide how to receive the funds: cash-out in a lump sum, receive monthly payments for a set period of time, or even open a line of credit.
There are limits to how much you can borrow, typically no more than 70% of the current value of your home. That said, there are no limits on how you use the funds. With a reverse mortgage, you can defer your mortgage payments until you sell the house or move.
Worth noting, interest will accrue on your new mortgage, but rarely will your mortgage balance surpass the value of your home.
How do I know if I’m eligible for a reverse mortgage?
To be eligible for a reverse mortgage, the homeowner must be at least 62 years of age and have a substantial amount of equity in their home. What is considered substantial home equity? Reverse mortgages are typically only approved for homeowners who own at least 50% of their home.
This protects both the homeowner and the mortgage lender by making sure the property can tolerate shifts in the housing market and isn’t overly leveraged. Homeowners who own 70%-100% of their home are in the best position to apply and get approved.
Many homeowners use a reverse mortgage to supplement retirement income, help with monthly expenses or healthcare needs, or even take advantage of investment opportunities.
Do I still have to make mortgage payments with a reverse mortgage?
No. One of the biggest benefits of a reverse mortgage is the option to defer your mortgage payments. When you qualify for a reverse mortgage, you can decide how you want funds disbursed to you. For example, you can receive the funds as a lump sum, or you can receive monthly payments over a set period of time. You can even decide to set up the funds as a line of credit and only access it when you need to.
After you decide how you want to receive the funds, you can decide how you’d like to pay back your mortgage:
- Make monthly payments against the new balance.
- Defer payments for a set amount of time, agreed to by your lender.
- Defer payments indefinitely until you move or sell the home.
If you decide to defer payments on your reverse mortgage, the interest on your loan will continue to accrue. For this reason, the balance will slowly increase. However, the equity in your home will also most likely increase. The balance on a reverse mortgage will rarely surpass the value of the home.
What happens when it’s time to sell a home with a reverse mortgage?
Once the home is sold, the mortgage balance is paid in full, and any remaining equity is disbursed to the property owner (or heirs if there’s an estate).
If the home’s value is lower than the mortgage balance and the owner no longer wants to live in the home, the mortgage will be settled as a non-recourse loan. This means that the mortgage can be settled by giving the title to the mortgage lender. Neither the owner nor any heirs will be responsible for the remaining balance. Most reverse mortgages are backed by the FHA, which guarantees full payment to the mortgage lender.
One caveat: homeowners with a reverse mortgage must make sure to keep homeowner’s insurance and property taxes paid on time for the life of the loan. Defaulting on these payments can cause the home to go into foreclosure.
How do I apply for a reverse mortgage?
The loan application process for a reverse mortgage is similar to refinancing a mortgage. You’ll be required to provide current financial documentation such as bank statements and tax returns, a credit report, current income (such as social security or pensions), and personal identification.
In addition, you’ll need to meet with a HUD-approved agent who will clarify all the terms and requirements of a reverse mortgage.
Most importantly, to qualify for a reverse mortgage, you’ll need a property appraisal to confirm the current market value of your home. A home appraisal will determine how much equity you currently have which will impact how much you can borrow.
Considering a reverse mortgage is a big decision. We work with clients at every stage of homeownership and we can help you decide if a reverse mortgage is the best decision for you or your family. Our goal is to save you money and help you reach financial freedom. Give us a call to get started.