Paying bills and owning a home is an inevitable part of being independent. However, when you reach a certain age, you can allow the equity in your home to work on your behalf. Most people have heard about a reverse mortgage, but there are often many questions and some apprehension regarding this untypical form of a mortgage. Given the right circumstances, this type of mortgage can be very beneficial for you and your family. Let’s start with the basics to help you further understand how an arrangement like this works and how much money you can expect to receive.
What Is A Reverse Mortgage?
Reverse mortgages have been around for almost 30 years. The first home equity conversion mortgage (HECM) reverse mortgage loan was insured by FHA back in 1989, but there are still a lot of misconceptions surrounding them.
The HECM reverse mortgage loan is specifically designed for people age 62 and above. It allows you to convert a portion of the value of your home into money that you can use without ever having to repay it as long as you or your spouse live in the home as your primary residence and keep the property taxes and homeowners insurance current and maintain the home.
The loan only comes due when you move out of the home or pass away and interest will continue to accrue on it until it is paid off but you never have to make a payment on it as long as you live there. These loans have long been thought of the last resort for those who are cash-strapped. However, they have become a realistic way to improve your lifestyle during retirement and help to extend the life of your retirement savings.
Who Benefits Best From This Type of Loan?
A reverse mortgage works best for those who have no plans of moving in the near future. You still must be able to afford the cost of maintaining your home, and if you have an existing mortgage or equity line on your home, you will need to have enough equity in it to be able to pay these off with the proceed from the reverse mortgage.
If you have little to no equity in your home, a mortgage like this will not work for you. Also, if you plan on relocating in the next three to five years,
it might not be a worthwhile venture. Consequently, it is best to discuss your situation with a reverse mortgage specialist.
How Much Can I Expect To Receive?
There are three factors that determine the amount that you can receive from a HECM reverse mortgage:
- Age of the youngest homeowner (or non-borrowing spouse)
- The value of the home
- Interest Rate
Most people qualify to receive between 45% to 75% of the value of their home from a reverse mortgage. In a nutshell, the older you are and the more your home is worth, the more you can receive.
If you have an existing loan against the home, this loan will need to be paid in full. You can use the money from the reverse mortgage to pay it off but this means that you will receive less.
For instance, if you qualify to receive $180,000 based on the value of the home, your age and the interest rate, but you have a $120,000 mortgage, once the mortgage is paid off, you would only have $60,000 left over from the reverse mortgage.
Other Things To Consider With A Reverse Mortgage
There are no restrictions on what you do with the money. You can use it to fix up your home or take a cruise, or both, the choice is up to you. However, there are some restrictions on the amount of money available during the first 12 months of the loan. A lot of people like to receive some money up front and then set up a line of credit to keep in reserve. Interest is not charged on any funds not used and the line of credit actually grows larger over time.
The way in which you choose to receive the funds from a reverse mortgage are very flexible. You have a number of choices:
- Lump Sum – Taking all the money out at once (usually used to pay an existing mortgage)
- Line of Credit – The money is available whenever you need it but you are only charged interest on the amount actually used
- Monthly Payment – The lender will deposit money into your bank on a monthly basis
- Any combination of the above
Is A Reverse Mortgage Right For You?
If you are wondering if a reverse mortgage can work for you, you should talk with a reverse mortgage specialist. He will evaluate your current loan and the equity in your home. Though you can get an estimate of the amount you will receive from an online calculator, they can vary widely. You can’t really know the exact figures until you have a professional reverse mortgage specialist consider all the factors.
For you to receive this type of loan, you must talk with an independent third party that’s approved by HUD. These counselors will help you to review all your options and make sure this is the best choice for you. Call today to see if this loan is right for you.