When the idea of the reverse mortgage loan was first conceived in the early 1960’s, people quickly began to recognize that the concept was a brilliant answer to a common challenge.  Many senior homeowners wanted access to their home equity to help fund retirement while remaining in their home—and a reverse mortgage loan could help them do just that.  In addition, the loan proceeds would pay off any existing liens, thus eliminating the homeowner’s monthly mortgage payment.  Borrowers are responsible for paying property taxes, homeowner’s insurance, and home maintenance. The advantages were, and to this day still are, very appealing. But among many questions borrowers have, a popular one always surfaces first:

What amount of money can I actually get from a reverse mortgage?

This question is understandable since borrowers are primarily interested in a loan that provides an amount high enough to help them achieve their financial goals.  Read the following to learn how reverse mortgage loan proceeds are determined.

How Much Does a HECM Reverse Mortgage Loan Pay?

How much money you can access from a reverse mortgage will be calculated by a formula that takes into account the following key factors:

• AGE – You must be at least 62 to qualify. And because part of this calculation is determined by the estimated length of the loan, the older you are when you take out a reverse mortgage, the more cash you will have access to.
• HOME VALUE – Your home’s current appraised market value will help determine available loan proceeds. The higher the value, the higher the potential for cash.
• INTEREST RATES – Current interest rates affect how much money you receive. The lower the interest rate, the higher your available funds.
• FINANCIAL OBLIGATIONS – Fees and other financial obligations may also lower the amount you will receive. For example, if you have an existing mortgage balance left, it must be paid off first from your loan proceeds before you receive the rest.
• DISTRIBUTION TYPE – The type of distribution you choose, whether it be a lump sum, a partial sum, a line of credit, or a monthly disbursement, can affect your loan amount. The line of credit option typically gives you the highest possible proceeds, while the lump sum may give you the lowest.

Reverse Mortgage Loan-to-Value (LTV)

So what percentage of your home’s value can you actually access?  Since there are a number of factors that determine how much of your equity you may access with this loan, there is no specified reverse mortgage LTV that you can expect.  However, reverse mortgage professionals are equipped with tools to do this calculation for you, so we recommend calling your lender to learn what your reverse mortgage loan to value could be.

Reverse Mortgage Loan Limits

One important detail you may not realize is that there are loan limits in place for this financial product.  Although there isn’t an exact reverse mortgage maximum loan amount, there is a limit for how much of a home’s value a reverse mortgage can borrow against, which will in turn affect the maximum loan amount possible.  For the government-insured Home Equity Conversion Mortgage (HECM), the maximum reverse mortgage limit you can borrow against is $726,525 (Updated January 1st, 2019), even if your home is appraised at a higher value than that.

How Much Equity Do I Need to Have?

Many senior homeowners with an existing mortgage wonder if they are still eligible for this loan product.  The answer is yes, it may be possible.  In general, homeowners who are over the age of 62 with 50-55% or more equity in their home have a good chance of qualifying for a reverse mortgage.  However, if there is still a significant mortgage balance remaining, then payout may be minimal.  Because loan proceeds will always go towards paying off existing liens first, a reverse mortgage provides borrowers with the most disposable cash if the home is either paid off or the remaining mortgage balance is low.

Your exact reverse mortgage loan amount is most accurately identified by speaking with a reverse mortgage professional.  This professional will educate you on the reverse mortgage process, understand your specific situation and will help calculate your reverse mortgage quote by considering all of the factors above.  If you are ready to find out how much money you may be able to get from a reverse mortgage and learn more about this flexible retirement planning tool, call American Advisors Group at (888) 998-3147. Your reverse mortgage professional will be standing by to take your first step toward learning more about if a reverse mortgage is right for you.

Sources:

Bird, Beverly. “How Much Equity Do You Need for a Reverse Mortgage?” Finance.Zacks.com. Demand Media. ND. Web. 4 June 2015.

Gallagher, Mary. “What is the Loan to Value Ratio for a Reverse Mortgage?” Ehow.com. NP. ND. Web. 4 June 2015.

Plaehn, Tim. “What Percent of Value Can You Borrow on a Reverse Mortgage?” EveryDayLife.com. Demand Media. 4 June 2015. http://everydaylife.globalpost.com/percent-value-can-borrow-reverse-mortgage-41748.html

Sherman, Fraser. “Reverse Mortgage Lending Limits”. HomeGuides.SFgate.com. Demand Media. ND. Web. 4 June 2015.

“FHA Reverse Mortgages (HECMs) for Seniors.” HUD.gov. U.S. Department of Housing and Urban Development. ND.  Web. 4 June 2015. http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmabou

“Reverse Mortgages: Understanding the Basics.” EDIS.edu. University of Florida IFAS Extension. ND. 4 June 2015. http://edis.ifas.ufl.edu/fy1105

In the early 1960’s a new type of mortgage loan was designed specifically for senior homeowners who wished to access the equity in their home while aging in place.  This new loan became popular because it fulfilled a need that many borrowers had.  Senior homeowners wanted to stay living in their homes for the rest of their lives, and reverse mortgage loans were the perfect solution to help them do just that.

However, unexpectedly at times, some borrowers found that they needed to move away for one reason or another.  There were borrowers who needed to move into a nursing home for full-time care.  Others found it was best to live in their children’s home, or another geographical location.  Whatever the case may be, borrowers found that they had some questions about selling a home with a reverse mortgage.

Can you sell a house with a reverse mortgage?

A reverse mortgage is a mortgage loan that can be repaid at any time without penalty.  Therefore, the answer is yes: a borrower can sell a home with a reverse mortgage at any time they choose, just like a traditional mortgage.  When a borrower sells their home, they must repay the reverse mortgage loan balance and their lender will close their account.  Borrowers then keep the remaining equity.

Steps for selling a house with a reverse mortgage

The process of selling a home with a reverse mortgage is similar to selling a home in general, with a few differences.  Here is a typical breakdown of what the process may entail:

• Contact your reverse mortgage lender and confirm how much you owe on your loan, which would include any money you have received to date, the interest charged, and any other lender fees. Verify if there are any additional fees.  Obtain the full payoff quote in writing.
• You can find a real estate agent to help you with the sales process, although this is not required.
• List your home for sale.
• You could choose to utilize the services of a real estate attorney in order to ensure that the full payment of your reverse mortgage is handled correctly.
• Once your home is sold, ensure that the reverse mortgage loan is paid in full from proceeds and that your reverse mortgage account is closed. You may keep the remaining amount.

Once a borrower is aware of the few differences to take into account, they will be armed with the knowledge to sell their reverse mortgaged home in a similar manner as they would have done with any other home with a mortgage.

Do I have to notify my lender that I am selling the home?

One smart step is to confirm the home’s payoff in writing per the formal payoff quote, which is the approximate amount of money that is necessary in order to repay your reverse mortgage loan in full and close your account.

What happens to the money once I sell my home that has a reverse mortgage?

Once you sell your home, the proceeds from the sale will first go to repaying your reverse mortgage balance in full. Once all liens on your home and any fees associated with your sale are paid off, any remaining proceeds after that will be yours to keep.

Are there any penalties if I sell my home with a reverse mortgage?

There are no penalties to sell the home and repay your reverse mortgage loan.

Sources

Assad, Anna.  “How Can You Sell Your House After Doing a Reverse Mortgage?”  SFGate.com.  NP.  ND.  Web.  22 December 2015.  http://homeguides.sfgate.com/can-sell-house-after-doing-reverse-mortgage-3220.html

The Most Common Way to Repay a Reverse Mortgage

When you first begin to learn about a reverse mortgage and its associated advantages, your initial impression may be that the loan product is “too good to be true.” After all, a key advantage to this loan, designed for homeowners age 62 and older, is that it does not require the borrower to make monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance. Though at first this advantage may make it seem as if there is no repayment of the loan at all, the truth is that a reverse mortgage is simply another kind of home equity loan and does eventually get repaid. With that in mind, you may ask yourself: without a monthly mortgage payment, when and how would repayment of a reverse mortgage occur?

Reverse Mortgage Payoff

A reverse mortgage is different from other loan products because repayment is not accomplished through a monthly mortgage payment over time. Instead, it is repaid all at once at loan maturity. Loan maturity typically happens if you sell or transfer the title of your home or permanently leave the home. However, it may also occur if you default on the loan terms. You are considered to have permanently left the home if you do not live in it as your primary residence for more than 12 consecutive months. This can happen if you move into a nursing home or your child’s home, travel for an extended period of time, or pass away.

When any of these instances occur, the reverse mortgage loan becomes due and payable. The most common method of repayment is by selling the home, where proceeds from the sale are then used to repay the reverse mortgage loan in full. Either you or your heirs would typically take responsibility for the transaction and receive any remaining equity in the home after the reverse mortgage loan is repaid.

If the loan balance is larger than the home’s sale price, borrowers who have the federally-insured version of a reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), are offered additional protections. A HECM reverse mortgage ensures that borrowers are only responsible for the amount their home sells for, even if the loan balance surpasses this amount. The insurance, backed by the Federal Housing Administration (FHA), covers the remaining loan balance.

In instances when heirs prefer to keep the home instead of selling it, they may choose another form of repayment. Common alternatives include refinancing the reverse mortgage loan into a traditional mortgage, or the use of personal savings or funds. Qualifying heirs may also refinance the home into another reverse mortgage.

A reverse mortgage payoff isn’t limited to these options, however. If you would like to make payments on the reverse mortgage during the life of the loan, you certainly may do so without penalty. And, when making monthly mortgage payments, an amortization schedule can prove useful.

Reverse Mortgage Amortization Schedule

A reverse mortgage amortization schedule is a summary of some important information about the loan:

• The numbered years of the loan
• The interest rate
• How the loan interest may accrue over the course of the loan
• How the credit line may grow
• The remaining home equity, by year
• How the loan balance may change as time passes

Some borrowers choose to repay the interest each month to keep the mortgage balance from amortizing negatively. A way to do this is to calculate the interest plus the mortgage insurance for the year, and divide the amount by 12 months. If you choose to do this, you can rest assured that there are no penalties for making loan payments prior to its maturity date. However, many borrowers choose to enjoy the benefits of having no monthly mortgage payments with the understanding that, at loan maturity, proceeds from the sale of the home will be put towards repayment of the loan balance in full. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance. For additional questions, speak with your tax advisor about reverse mortgage tax implications and how they may affect you.

Homeowner’s Obligations

Although the reverse mortgage loan is a powerful financial tool that taps into your home equity while deferring repayment for a period of time, your obligations as a homeowner do not end at loan closing. It is important for you to note that continuation of the payments for homeowners insurance, property taxes, and maintenance of the home must still be upheld during the life of the loan in order to remain compliant with terms, as would be expected with any mortgage.

A reverse mortgage is a useful tool for senior homeowners to help fund retirement. And, with a few options for repayment, you can feel confident that you will find a method that works the best for your situation. To learn more about this flexible loan, contact a reverse mortgage professional at American Advisors Group to help you determine your options for repayment and the many ways you can benefit from the loan’s unique features.

Sources:

Paterson, Beth. “Reverse Mortgage Borrowers’ Responsibilities…or Consequences.” Rmsidac.com. 27 June 2010. Web. 29 June 2015. http://rmsidac.com/reverse-mortgage-borrowers-responsibilities-or-consequences/