Often, the first question potential borrowers have when they are considering a reverse mortgage is, “How much money can you get from a reverse mortgage?” The answer depends on a few factors, not the least of which is your home equity.
Borrowers also need to understand what options are available to them. There are a variety of reverse mortgages to choose from, and each comes with its own attributes, which will impact how much money a borrower can receive.
What Is Home Equity?
Home equity is the difference between the value of your home and any amount you owe on it. It’s often your greatest asset. It can be used in your later years to fund any number of things—your retirement, home improvements, or medical expenses, to name a few.
To calculate how much equity you have, take your home’s current value, then subtract the amount owed on your mortgage or any other liens, such as a second mortgage or a purchase loan you took out to buy your home. The difference is your home equity.
Making Use of Home Equity
One way to make home equity work for you is to leverage it through a reverse mortgage. These loans were specifically designed to allow people of retirement age to access the equity in their homes without selling or moving.
There are four types of reverse mortgages: a home equity conversion mortgage (HECM), a home equity conversion mortgage for purchase, a proprietary reverse mortgage, and a single-purpose reverse mortgage. Here’s a rundown of the types of reverse mortgages and how funding works with each.
Home Equity Conversion Mortgage (HECM)
HECMs are the most common type of reverse mortgage loan. They are popular because they have no income limitations or medical requirements, and the loan proceeds can generally be used for any purpose.
The HECM program is regulated by the U.S. Department of Housing and Urban Development (HUD). If you apply for a HECM, you must attend counseling to learn about the costs, payment options, and responsibilities involved in having such a loan. You’ll learn about nonprofit or government-issued alternatives for which you might be eligible and whether you should opt for proprietary or a single-purpose reverse mortgage.
After counseling, you’ll find out how much you can borrow. Your age, home value, and current interest rates determine the figure.
You can elect to receive funds in a lump sum, monthly payments, a line of credit, or a combination of the three.
Home Equity Conversion Mortgage for Purchase
If you are 62 years of age or older and want to buy a new home, then a HECM for purchase may be a good option. These loans were designed to help seniors relocate or downsize to a new home without having monthly mortgage payments. It has a bonus of only one set of closing costs. (Had you bought the home first and then sought a reverse mortgage, you would have to pay the two sets of costs.)
As with any reverse mortgage, interest is added to the loan balance. The loan must be repaid when you or your surviving spouse permanently move or pass away.
One significant aspect of this loan is the loan-to-value ratio. The loan typically requires a down payment of 29% to 63% of the purchase price, depending on the borrower’s age or eligible non-borrowing spouse’s age, if applicable. This range assumes closing costs will be financed. The rest of the funds for purchase come from the HECM loan.
Proprietary Reverse Mortgage (PRM)
Proprietary reverse mortgages (PRMs) are private loans not part of the HUD HECM program. More expensive homes qualify for a bigger loan. These can be a good option for higher value homes, and there is no mandatory counseling, though a lender may still require it.
Single-Purpose Reverse Mortgage (SPRM)
Single-purpose reverse mortgages (SPRMs) are the least expensive type of reverse mortgage as their proceeds can only be used for a single, agreed-upon use, like replacing a roof or paying medical bills. These are sometimes offered by state or local government agencies or nonprofit organizations.
These mortgages are designed for people with low to moderate incomes and are not available everywhere. They are particularly useful if you cannot qualify for the other types of reverse mortgages.
In the end, potential borrowers need to consider how much money they can receive through a reverse mortgage and what type of loan is best for their circumstances. An independent financial advisor can help you weigh your options and make the best decision for your personal situation.
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.