Home equity now represents more than two-thirds of total wealth for the average 65-year-old American couple1. Do you know how much money is in your home?
Reverse mortgages are growing in popularity as a retirement planning tool for homeowners who have significant equity in their home – and want flexible access to wealth. With a reverse mortgage, your home equity is converted into cash for what matters most to you.
From paying bills to setting aside a safety net for future expenses, to offsetting the ever-increasing cost of healthcare, to making ‘aging in place’ modifications to your home, or even helping out a family member or loved one with a major expense – there are plenty of ways you may opt to use reverse mortgage proceeds. The possibilities are endless!
But before you start planning what you would do with some additional cash flow in retirement, let’s start by addressing the question at hand:
“How much money could I get with a reverse mortgage?”
The short answer here is, “it depends.” There are several variables that are taken into account to determine just how much of your home equity you’ll be able to access with a reverse mortgage. For instance, the amount of proceeds known as “the principal limit” can depend on your age, type of reverse mortgage, home value, and current interest rate. Let’s examine just how some of these variables play a role in calculating the “principal limit.”
You must be at least age 62 to qualify for a reverse mortgage. And when it comes to calculating the principal limit, your age is also a key factor. Since the principal limit accounts for the estimated length of the loan, the older your age, the more cash you’ll be able to receive. Just consider this scenario: at the minimum age of 62 and a five percent interest rate, you could borrow against 52.4% of your home equity, whereas waiting until age 75 could allow you to borrow 61.4% – nearly 10% more. In the event you have a spouse or co-borrower to be included on the reverse mortgage, the age of the youngest person is used to determine the principal limit.
The principal limit and home value also share a congruent relationship. As a general rule of thumb, the higher value your home is, the more available cash you could receive. This is why one of the first steps in the reverse mortgage process is to have an appraisal performed on your property. Not only does this determine your current home value, but it also identifies any repairs required to meet satisfactory conditions enforced by the Department of Housing and Urban Development (HUD).
Interest rates and the principal limit have an inverse relationship. Simply stated, the lower the current interest rate, the more funds available. Fortunately, today’s rates are historically low – which makes now an advantageous time to secure even more cash with a reverse mortgage. Learn more about reverse interest rates here.
Distribution of Funds
Reverse mortgage funds are first used to pay off any existing mortgage on your home. One any existing mortgage is paid off, there are three main options for how you may opt to receive the remaining reverse mortgage funds. The distribution method you select could affect the total amount you receive.
Lump Sum Payment
As its name suggests, a lump sum payment allows you to withdraw all available loan proceeds at once – at a fixed-rate. This method of distribution comes at a higher cost than other payout options because it requires that interest and fees are paid on the entire loan amount drawn at closing. Once this is accounted for, the total amount of available funds remaining may be lower compared to other options. Also, it’s worth nothing that lump sum payments do not have a credit line feature available, which may present a higher risk if you’re relatively young and can potentially outlive loan funds.
Line of Credit
The line of credit payout options allows you to access some funds immediately at the time of closing, while leaving some available for future use. Any funds remaining after closing are kept in a growing line of credit, which allows you to access a maximum amount as stated in the loan terms. With an adjustable interest rate, the distributions from a line of credit come at a lower cost than a lump sum payment as interest and fees are required to be paid only on the funds that are used. Better yet, the line of credit payout option can be combined with a monthly payout distribution.
Like the line of credit, the monthly payout distribution features an adjustable interest rate and lower cost than a lump sum payment. With the ability to receive a monthly payout to supplement retirement income, you are only required to pay interest and fees that have been drawn. There are two options for receiving funds with a monthly payout. You can either opt for a term payout, which provides fixed monthly payments for a set number of years, or a tenure payout, in which you are provided fixed monthly payments for as long as you meet the terms of the loan, and the payout does not cause the balance to exceed the loan amount.
With so many factors playing a role in calculating the principal limit, these are just some of the important things you should talk to your lender about when getting the facts on a reverse mortgage.
At Longbridge Financial, reverse mortgages are all that we do. And we’re committed to recommending the program only after we make certain that the reverse mortgage is right for you and meets your needs. We’ll get to know you, your goals, your home, and your finances as we discuss your options.