overrule mortgages are becoming increasingly popular as a retirement plan creature for homeowners who have significant equity in their homes — or own their properties outright — and want elastic access to their home equity. however, homeowners will pay more in borrowing costs, and revoke mortgage rules make it clear they ’ re still responsible for ongoing expenses .
How does a reverse mortgage work?
A rearward mortgage has very different moving parts compared to a regular mortgage. With a reverse mortgage :
Your age is the most important factor in how much you qualify for. The minimal age may be 62 for a reverse mortgage, but older borrowers have more turn back mortgage borrowing power. There ’ sulfur a catch for marital couples : Lenders consider the youngest borrower ’ randomness long time for the maximal lend sum .
You must have at least 50% equity in most cases. Lenders want to ensure you don ’ thyroxine end up owing more than your home is worth, so they set a much higher initial equity requirement than regular mortgage programs. A home appraisal is always required as function of the rearward mortgage process to get an indifferent opinion of your home ’ s measure from a license real estate appraiser .
You don’t have to meet any debt-to-income (DTI) ratio requirements. No mortgage payment means no DTI ratio requirements, which are a major factor in qualifying for a regular mortgage. however, you will have to prove you have the resources to pay ongoing homeownership costs like homeowners policy, property taxes and maintenance costs .
Your interest rate will have an impact on how much you qualify for. Because sake charges are added to your loan every month, the lower the matter to rate, the more you ’ ll be able to borrow .
You have more choices for how you can convert your equity into cash. alternatively of making payments each calendar month, you can choose from one or a combination of the keep up six ways to tap your fairness :
- Lump sum. This option involves a single large payment made to you after your loan closes, allowing you to pad your cash reserves to use as needed. An added bonus of this choice: Your interest rate will be fixed.
- Tenure. You can choose regular monthly payments for as long as you or a co-borrower live in the home as your primary residence.
- Term. If you need a few years’ worth of extra income, this option lets you choose a set number of months you’ll receive regular monthly payments.
- Line of credit. If you prefer an extra cushion to cover unexpected expenses as you age, the line of credit option may be a good fit. It works similar to a credit card or home equity line of credit (HELOC), giving you access to cash as needed up to the available balance.
- Modified tenure. Choose this option if you want to set up a line of credit in addition to receiving a monthly payment amount for as long as you and a spouse or co-borrower live in the home.
- Modified term. You can add a line of credit to a schedule of monthly payments you receive for a set time you choose.
You’ll be required to meet with a housing counselor. To make indisputable you amply understand all the pros and cons of a overrule mortgage, the U.S. Department of Housing and Urban Development ( HUD ) requires counseling from a HUD-approved counselor before applying .
Your loan could be foreclosed if you move out of the home. Homeowners with reversion mortgages should know the “ triggers ” that could result in a reverse mortgage foreclosure, which include :
- The death of one or both of the owners
- Evidence that the borrower is not living in the home as a primary residence
- Notification that property taxes or homeowners insurance have not been paid
- Evidence that the home isn’t being maintained
How you can use a reverse mortgage
rearward mortgages give you the tractability to use your home plate equity in a numeral of different ways. With a Home Equity Conversion Mortgage ( HECM ) you can :
- Pay off your current mortgage and other expenses to reduce your monthly expenses
- Remodel your home to accommodate changing health and age limitations
- Keep a line of credit for unexpected expenses and financial emergencies
- Pay for health insurance until you’re eligible for Medicare coverage or Social Security income
- Supplement your retirement income
- Pay for long term care and health needs
- Pay for transportation if you’re unable to drive
- Pay for a child or grandchild’s college or professional education
Who is eligible for a reverse mortgage?
Reverse mortgage requirements are very different from those for traditional mortgages. To be eligible for a reversion mortgage, you must :
- Be at least 62 years old
- Own your home outright or have at least 50% equity
- Live in the home you’re financing for most of the year
- Not be delinquent on federal debt, such as student loans or income taxes
- Prove you can pay ongoing property taxes and homeowners insurance premiums
- Maintain your home in good condition, or use reverse mortgage funds for necessary repairs
- Get counseling from a HUD-approved reverse mortgage counselor
Types of reverse mortgages
Most borrowers choose a Home Equity Conversion Mortgage, which is backed by the Federal Housing Administration ( FHA ). HECMs are the most common type of invert mortgage, because they provide lenders with protection against losses by charging borrowers mortgage insurance while providing consumers with the precaution of a ask “ moment opinion ” from a impersonal reverse mortgage counselor .
There are besides secret lenders that offer reversion mortgage products, though the guidelines outlined here focus on HECMs. Most homeowners choose from three different types of change by reversal mortgages :
Home Equity Conversion Mortgages (HECMs). Funds from a HECM can be used for any purpose. HECMs have a “ utmost claim total, ” which limits how much a homeowner can borrow. In 2022, the maximum claim amount for a HECM is $ 970,800 in all parts of the country, vitamin a well as Guam and the U.S. Virgin Islands .
Proprietary reverse mortgages. private companies offer inverse mortgage programs offering higher loanword amounts than the HECM loanword limits set by the FHA. You may be able to borrow more money from the beginning than with a HECM, but these proprietorship reverse loans don ’ t have federal insurance back and may be more expensive .
Single-purpose reverse mortgages. State and local politics agencies may offer special reverse mortgages to meet specific homeowner needs, such as paying past-due place taxes or making repairs to keep a home safe and livable. however, not all states offer them .
How much money can you get from a reverse mortgage?
You can borrow up to the chief limit on a reverse mortgage based on your senesce, the pastime rate on your loanword and the survey value of your family. You can use a overrule mortgage calculator for a quick calculate of the swelling sum amount you might qualify for if you have the following information handy :
- Your age
- Type of property you own (single-family, townhome, condo or multifamily or manufactured home)
- Your home’s value
- Your current mortgage balance (if any)
- Whether the home is your primary residence
- Your home’s ZIP code
To calculate condition and line of credit options, it ’ mho best to contact reverse mortgage lend officers who have specialized loan software to do the calculations for you .
According to the Consumer Financial Protection Bureau ( CFPB ) :
- Older borrowers with higher-priced homes and lower rates will get more reverse mortgage money
- Younger borrowers with lower-priced homes and higher rates will get less reverse mortgage money
How much does a reverse mortgage cost?
| Reverse mortgage fees at a glance | |
| Lender fees |
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| Mortgage insurance |
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| HECM counseling |
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| Monthly interest charges |
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Lender fees
You ’ ll pay an origin tip to cover the lender ’ second expenses for originating your lend. The fees break out as follows :
- The greater of $2,500 or 2% of the first $200,000 of your home’s appraised value
- 1% of your home’s value above $200,000
- A maximum of $6,000 in total lender HECM fees
Mortgage insurance
similar to a unconstipated FHA lend, with a HECM, you ’ ll pay an upfront mortgage policy agio ( UFMIP ) and an annual mortgage policy premium ( MIP ) .
- The UFMIP is 2% of your home’s value and is typically rolled into your loan amount
- The annual MIP charge is 0.5% of your loan balance
- The MIP amount will increase as your loan balance increases
HECM counseling
You ’ ll typically spend $ 125 for a reverse mortgage counseling school term with a HUD-approved agency. Although revoke mortgage rules require the guidance, the fee may be waived in certain cases .
Monthly interest charges
Your monthly interest charges grow as your lend balance wheel grows. Unless you choose the hunk union option, your overrule mortgage interest rate is adjustable, which could promptly reduce your available equity if rates are on the rise .
How to spot a reverse mortgage scam
Below are some tips to avoid becoming a victim of reverse mortgage scams :
- Don’t reply to unsolicited reverse mortgage offers by email or over the phone.
- Never give out confidential personal information over the phone or by email.
- Contact a HUD-approved counselor if you’re not sure an offer is legitimate.
- Don’t sign anything you don’t understand.
Reverse mortgage pros and cons
Before you sign on the dot line, consider the invert mortgage pros and cons :
Pros
You can stay in your home longer with no monthly mortgage payment
You ’ ll have more choices for how to tap your equity than regular mortgages
You can add to your retirement income and leave other retirement accounts alone
You can pay off debt or have a showery day fund for unexpected medical expenses
You won ’ thymine pay taxes on reverse mortgage money you receive
You ’ ll protect your heirs from inheriting an subaqueous family
Cons
Your home ’ mho fairness will shrink every calendar month
You ’ ll give high gear inverse mortgage close up costs
You may disqualify yourself from early income benefits
Your heir will inherit less
You could lose your home to foreclosure if you can ’ thymine live in the home
You won ’ triiodothyronine get a tax tax write-off on the reverse mortgage interest until all or part of the libra is repaid
Is a reverse mortgage a good idea?
A overrule mortgage is a estimable estimate if you fully understand the pros and cons listed above, and don ’ t have other fiscal resources to retire well. The table below provides some revoke mortgage food for think :
| A reverse mortgage may be a good idea if: | A reverse mortgage may not be a good idea if: |
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Alternatives to a reverse mortgage
If you don ’ t have enough equity, or you ’ re not erstwhile enough to take out a reverse mortgage, but you do have enough retirement income to qualify, consider these revoke mortgage alternatives :
Read more: What Is a Debt Management Plan? – NerdWallet
HOME EQUITY LOAN
A home fairness loanword loan allows you to borrow as much equity as you need in a collocate summarize with a fixed-rate payment. Home equity loans frequently come in terms of five to 15 years, but you ’ ll want to show you make enough income to qualify .
HOME EQUITY LINE OF CREDIT
A home plate fairness line of credit ( HELOC ) works like a credit calling card that you can use as needed. You ’ ll normally make interest-only payments on the sum you draw for a set time, called a “ draw period. ” After the trace period ends, the libra is paid in installments during the “ repayment period. ” HELOCs tend to have variable rates .
CASH-OUT REFINANCE
A cash-out refinance replaces your stream mortgage with a modern loanword that has a higher proportion, which allows you to pocket the dispute in cash. conventional and FHA cash-out refinances allow you to borrow up to 80 % of your home ’ mho respect. eligible military borrowers may qualify to tap up to 90 % of their home ’ s respect with a cash-out refinance guaranteed by the U.S. Department of Veterans Affairs ( VA ) .
