If you’re like many seniors who are living on a fixed income, you may have considered a reverse mortgage to eliminate monthly mortgage payments and help control your finances.
A reverse mortgage allows homeowners aged 62 and older to tap into their home’s equity and convert it into tax-free cash without monthly repayments.
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Whether funding retirement dreams or just alleviating money worries, reverse mortgages provide useful options.
However, they’re also a complex financial product with long-term implications around remaining equity and estate planning.
Learn how to evaluate if a reverse mortgage may suit your unique situation. Use this overview of five essential things to know before applying for a reverse mortgage to set realistic expectations.
Your home needs sufficient equity
A reverse mortgage allows you to access a portion of your home’s equity as cash. But to qualify, your property must have enough equity to make the loan worthwhile.
While the FHA doesn’t enforce a minimum home value, ideally you should have at least 50% equity available to tap into.
The more remaining equity beyond your existing mortgage, the higher the cash amount you’ll be eligible to receive.
Additionally, there are rules around maximum equity withdrawal: For 2023, the maximum reverse mortgage claim amount is capped at $1,089,300. Even if your home is worth $2 million, the most equity you can access is limited by this threshold.
Understanding exactly where your equity position stands, and limits around what equity you have remaining to leverage, will determine how well a reverse mortgage aligns with your goals.
You can get an assessment to illustrate your available equity, projected lending amounts accounting for your age and rate quotes tailored to current market conditions.
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Your age impacts potential proceeds
Another key factor in reverse mortgage eligibility is your age at the time you take out the loan. Age greatly influences potential lump sum payouts.
The minimum qualifying age set by the FHA is 62. All borrowers must be at least 62 years old. There is no maximum specific age cutoff for payouts.
Why does age matter so much? Because reverse mortgages get repaid once the borrowers move out, sell, or pass away.
Younger applicants have longer expected lifespans, meaning more years living in the home before mortgage repayment. This represents an increased risk to the lender.
Older applicants have shorter expected terms before repayment events kick in. This lower relative risk means lenders can provide higher payouts.
Bottom line—the older you are when you take out a reverse mortgage, the more equity you will have access to, up to prevailing lending limits. Your age can greatly impact potential lump sum amounts, lines of credit, or monthly payments.
Beware of closing costs
While accessing built-up home equity can be valuable, reverse mortgages also come with closing costs that impact your bottom line:
- Origination fee: An upfront charge assessed by the lender, typically ranging from 2-6% of your total available loan amount.
- Other closing costs: Third-party fees include the home appraisal, title searches to verify ownership and document recording.
- Mortgage insurance: Because reverse mortgages carry risks of non-repayment, this insurance protects the lender from losses.
All these costs come right off the top of your loan proceeds, reducing the net funds you’ll have to spend.
Make sure to factor them in when determining how proceeds will be used and budgeted.
Our loan advisors provide itemized closing cost breakdowns and explanations so you know what to expect before committing to a reverse mortgage.
Consider impacts on your estate
Since reverse mortgages reduce remaining home equity with each dollar you access, your heirs may inherit less in the future. The loan balance cuts into the future sales proceeds beneficiaries would receive.
Consider how taking out a reverse mortgage aligns with your estate planning goals. Will reduced equity availability in the future cause issues for your intended heirs?
These are discussions to have with financial advisors, estate planners, and family members themselves.
Outlining intentions clearly for all parties involved can help reduce complications down the road.
Seek unbiased guidance
Because reverse mortgages have complex tradeoffs to evaluate, consult with mortgage professionals such as Compass Mortgage to ensure you assess strategically. It’s vital to explore alternatives aligned with your budget and long-term financial plan.
Getting quotes from multiple lenders also prevents you from overpaying on fees or interest rates. Their goal should be guiding you to the optimal product fit rather than selling at all costs.
The right reverse mortgage tailored to your situation can certainly help supplement retirement income. But make sure you understand all factors before signing.
Get personalized quotes from Compass Mortgage
Wondering if a reverse mortgage is the right solution to achieve your retirement goals?
Connect with our team at Compass today for transparent, customized quotes and assessments. We’ll account for your unique age, home value, equity position, rate environment, and objectives.
Our experienced advisors are here to explain options and scenarios in everyday language so you can make an informed decision that supports your plans.
Apply with Compass Mortgage today to see why we’re the home to a better mortgage experience.