[OPENING DISCLOSURE]
For reverse mortgage loans: The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
How Much Money Could You Get From a Reverse Mortgage
One of the first things most people want to know about a reverse mortgage is how much money they could receive. The answer is: it depends. The amount available is based on several factors, including your age, home value, current interest rates, and any remaining mortgage balance.
Let’s walk through the key factors so you can see what influences the amount available and get a clearer idea of what to expect.
Borrower Age
To potentially be eligible for a home equity conversion mortgage (HECM), the most common reverse mortgage, a borrower has to be 62 years or older. Proprietary reverse mortgages offered by private lenders may have different requirements, but borrowers usually need to be at least 55.
Age plays an important role in how much money you could receive. In general, younger borrowers receive less because lenders expect the loan to last longer. Older borrowers may be eligible for more since the loan is expected to be in place for a shorter period of time.
Because the loan must be repaid when the borrower passes away, lenders structure the amount to reduce the chance that the balance owed will eventually exceed the home’s value. Therefore, younger borrowers typically qualify for less.
Reverse Loan Type
The type of reverse mortgage you choose affects how much money may be available. With a HECM, the Federal Housing Administration (FHA) sets a maximum lending limit that applies nationwide. Proprietary reverse mortgages may allow for higher limits that go beyond what is available through a HECM.
Because loan type and lending limits go hand in hand, this choice plays a direct role in the size of the payout you could receive.
Interest Rate
Like any loan, a reverse mortgage accrues interest. The higher the interest rate, the less money will generally be available to you. This is because interest is added to your loan balance and compounds over time.
When determining how much you could access, lenders estimate the interest that may accrue over the life of the loan and adjust the available funds accordingly.
Current Mortgage Amount
If you still have a mortgage on your home, a reverse mortgage must first be used to pay off that balance. This is a requirement of the loan. After that, any remaining proceeds from your reverse mortgage will be made available to you. The amount left over depends on how much equity you have in your home once your current mortgage is paid off.
Home Value and Equity
Your home’s value is an important part of the reverse mortgage process. Lenders order an appraisal to determine what your property is worth and how much equity you have. In general, the higher your home’s value and the more equity you hold, the greater the amount of funds you may be able to access.
Money for a LESA Account
As part of the reverse mortgage process, lenders complete a financial assessment to ensure borrowers can keep up with important obligations like property taxes and insurance. If the lender sees potential challenges, it may set up a life expectancy set aside (LESA).
A LESA sets aside part of the loan proceeds to cover property taxes and sometimes insurance. This helps ensure these expenses are paid on time and reduces the chance of default. While it serves as a borrower protection, it also lowers the amount of proceeds available.
Closing Costs and Fees
Every reverse mortgage includes certain closing costs and fees, similar to a traditional mortgage. Many borrowers choose to roll these expenses into the loan itself. When this happens, the costs are paid from the loan proceeds, which reduces the amount of cash available to the borrower.
If you prefer, you may be able to pay some or all of these costs out of pocket. Doing so keeps more of the loan proceeds available for you to use.
Increasing Cash Flow
A reverse mortgage may also improve monthly cash flow by removing the need to make ongoing monthly mortgage payments. Keep in mind, borrowers are still responsible for using the home as their primary residence, maintaining the home, and paying property charges such as taxes, insurance, and other required fees.
While this boost to cash flow is not considered part of the loan proceeds, the elimination of monthly mortgage payments helps reduce regular expenses and free up income. This feature alone may provide added financial flexibility, even before accessing any proceeds from the loan.
[CLOSING DISCLOSURES]
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
