Is A Reverse Mortgage Right For You?
Will A Reverse Mortgage Work For You?
Reverse mortgage options have been around for years, however, there is still a lot of confusion about them. The programs tend to be complicated and are not necessarily right for everyone so it’s important to understand what a reverse mortgage is before making a decision.
How a Reverse Mortgage Works
Homeowners who are 62 years old can supplement their retirement years income in with a reverse mortgage loan if they live in the home and have a certain amount of home equity.
How Much Does a Reverse Mortgage Pay?
The amount of money borrowed on a reverse mortgage depends on how much home equity is available. Typically no more than 80% of a home’s equity can be used. The maximum amount anyone can receive from a reverse mortgage is $680,000, however, most loans are much less. The amount the loan from a reverse mortgage lender will pay depends on several factors, including age, current home value, and interest rate. This chart shows how these factors determine the amount of equity available:
- Interest rate: 4% 5% 6%
- 65 year old borrower: 49% 43% 38%
- 90 year old borrower: 69% 65% 62%
Different Types of Loan Payout Options
A homeowner can choose how the life of the loan amount is paid out and can either receive monthly payments or they can get it all in one payout. Other variations include a hybrid option, which is an upfront lump sum and monthly payments; opening a line of credit, where money is withdrawn as needed, usually with limits.
What Are the Costs of A Reverse Mortgage?
A reverse mortgage is like any other loan and has various closing costs associated with it including interest, an origination fee, and set aside fees. Set aside fees include home appraisals and any repairs necessary to get approved for the loan.
Home appraisal costs vary from $250 to $1,000 and depend on the size of the home and accounts for any problems that might come up during the appraisal process. Current existing mortgage rates determine the amount the homeowner is charged against the loan balance every year. This amount is assessed at the end of the loan term or when the home is sold.
Lenders charge an origination fee to cover their cost of processing the loan application. This fee is typically assessed at 2% on the first $200k of a home’s value and 1% on the remaining amount, with a max of $6k. If the home’s value is 125k or less, the origination fee cannot exceed $2,500.
As an example, a home valued at $350k can expect to pay:
- $200,000 x 2% = $4,000
- $150,000 x 1% = $1,500
- TOTAL: $5,500
Is it Worth It?
Understanding how a reverse mortgage works and the associated costs can help a homeowner make an informed decision and allow them to move forward with their loan process with confidence that this is the right choice for them.
Although a reverse mortgage program is not right for every homeowner, by doing the homework you can make an informed decision. Tapping into your home’s equity can bring new life to a home with renovations or maybe you just want to take that crazy vacation you’ve been talking about. However you spend the money make sure that you are getting the best loan for you.
For more information about reverse mortgages, buying or selling a home, contact your local real estate agent.