How Much Equity Do You Need for a Reverse Mortgage?

A reverse mortgage allows homeowners who are at least 62 years old to draw on their home equity without having to make monthly payments. 

Unlike a traditional mortgage, rather than paying down the balance over time, reverse mortgage balances grow due to interest accumulating on the loan. The loan doesn’t come due until the house is sold or the owner dies.

You can expect to need at least a 50% equity stake in your home to use a reverse mortgage. In general, the more equity you have in your property, the more cash you can access through a reverse mortgage product. Here’s what you need to know about how much equity you’ll need for a reverse mortgage.

How much equity is needed for a reverse mortgage?

The equity you need to qualify varies depending on the lender you’re getting a reverse mortgage with. But lenders generally require you to have at least 50% equity in your home.

3 types of reverse mortgages 

Types of reverse mortgage	Insured by the federal government?	Purpose
Home equity conversion mortgage (HECM)	Yes	Almost any legal purpose, such as everyday living expenses and home improvement projects
Single-purpose reverse mortgage	No	You may only be able to use funds for certain expenses, like home improvements or property taxes.
Private reverse mortgage	No	You can use the funds for just about any legal purpose

The most common type of reverse mortgage is a HECM, which is backed by the Federal Housing Administration (FHA). HECMs are offered through traditional lenders. You can find a list of lenders that provide them by visiting the U.S. Department of Housing’s website.

If you’re considering a HECM, the Consumer Financial Protection Bureau recommends owning your home outright or having a “low mortgage balance.” 

You can expect to need an equity stake of at least 50% when applying for a HECM or reverse mortgage—meaning your balance is less than half of your home’s current value.

Tip

Your reverse mortgage is used to pay off your mortgage balance before you can take cash out of the home. The lower that balance is, the more equity you can tap. So if your equity in the home is on the low end and you are not sure  about whether you qualify or not, waiting a few more months or years could make a massive difference.

The amount you can borrow from your equity depends on your age and the interest rate you qualify for. For a HECM loan, this amount ranges from 40% to 75% of your equity, but you’ll also need to include closing costs—so the amount you take home can be less than that.

Let’s look at two scenarios to see how your equity stake can affect your access to cash:

John owns his home outright, and it’s now valued at $250,000

At age 65, John could borrow up to 43% of his home’s equity if the reverse mortgage rate is 5%, based on the most recent data from the U.S. Department of Housing.

This means he could borrow up to:

$107,500 ($250,000 x 43%, minus closing costs)

If he pays a 2% closing cost on the loan, his closing fee would be $2,150 ($107,500 x 2%). As a result, he could borrow up to $105,350 ( $107,500 – $2,150).

Detail	Value
Current value of home	$250,000
Outstanding mortgage balance	$0
Equity in home	100%
Estimated HECM payment	$105,350

Sherri, also 65, has paid off 60% of her home, now valued at $250,000.

This means she has $150,000 worth of equity in her home ($250,000 x 60%) If she also takes out a HECM with a 5% interest rate, this means she could borrow up to 43% of her home’s equity. 

$150,000 * 43% = $64,500

If she has to pay 3% in closing costs on the loan, her total closing costs would be $1,935 ($64,500 x 3%). As a result, the maximum amount she could borrow with a HECM would be $62,565 ($64,500 – $1,935).

Detail	Value
Current value of home	$250,000
Outstanding mortgage balance	$100,000
Equity in home	60%
Estimated HECM payment	$62,565

There’s no hard and fast rule for how much equity you need for a reverse mortgage, but as you can see from the examples above, the more you have, the more money you can access.

Other eligibility requirements for reverse mortgages

The primary requirement for a reverse mortgage is that you’re at least 62 years old. These loans are designed for older adults on limited incomes, so homeowners under this age are ineligible.

Other eligibility requirements include:

• The home must be your primary residence. You live there for the majority of the year.
• Your property must remain in good condition. The lender needs to know it can sell it at full market value to pay off the balance.
• You’re current on all federal debts (if applying for a HECM). This means you can’t be behind on student loans or owe tax debts to the IRS.
• You may need to complete reverse mortgage counseling before approval. This is required when applying for a HECM, and other lenders might require it.
• You have to prove you have the financial resources to cover the costs of homeownership. This includes taxes, insurance, and HOA dues.

You’ll also need to pay for mortgage insurance. If you’re taking out a HECM, you must cover an upfront and annual mortgage insurance premium. The premium ranges from 2% upfront and 0.5% each year over the life of the loan.

Reverse mortgage repayment

Reverse mortgages come with several payment options. You can take them as a line of credit (drawing on them like a credit card as needed), a monthly payment, or in a lump sum, which offers flexibility in how and when you can use them.

Your loan isn’t due until you no longer live in the home, so the balance (plus interest) is paid off when you move and sell the home or when your estate or heirs sell the property.

Unlike traditional loans, your balance doesn’t go down month over month because you aren’t making payments. Instead, it rises, gathering interest until the balance is paid off.

Reverse mortgage and taxes

Most mortgages include taxes and insurance in the monthly payment, but because reverse mortgages don’t have monthly payments, you’re responsible for paying property tax and homeowners insurance from your income sources, savings account, or checking account.

You can find reverse mortgages through several mortgage lenders. Check out our guide to compare the best reverse mortgage companies.

Risks of reverse mortgages

Reverse mortgages can be tempting if you’re on a limited income, but they’re not without risks. Here are several hazards you could face when getting a reverse mortgage:

• You could be evicted if your spouse dies. Reverse mortgages become due in full when the person on the loan dies. If your spouse is not listed as a co-borrower on the loan, they could face eviction if they don’t repay the loan.
• You can’t leave home for an extended period. Reverse mortgages require the home to be your primary residence, and many stipulate how long the property can be vacant. If you leave the home for an extended amount of time (for a hospital stay, for example), it may mean you owe your full loan balance much sooner than you expected.
• If home values drop, you could owe more than your property is worth. This might leave your children or heirs footing the bill for the remaining balance.
• Reverse mortgages can also be expensive. They often come with high fees and origination charges, meaning they may not be the most affordable way to tap your home equity.

Consult with a financial professional or counselor who specializes in reverse mortgages before moving forward. Consider why you need a reverse mortgage and review the requirements. This decision should not be made in haste.

Erin Kinkade

CFP®

Alternatives to a reverse mortgage 

If you don’t meet the age requirements, have little equity, or otherwise don’t qualify for a reverse mortgage, you have other ways to tap your home for cash.

Here’s a table highlighting five alternatives and who they might be best for.

Alternative	Best for
Home equity loan or HELOC	Tapping your home’s equity while keeping the original terms of your mortgage
Cash-out refinance	Applicants who can qualify for a new loan with a lower rate and want to withdraw cash as closing
Sell your property	Homeowners who want to downsize
Share your home’s equity or appreciation	Homeowners who need extra cash but don’t want to borrow against their home’s equity
Sell and lease back your home	Homeowners who want to sell their home but want to continue living in it

Home equity loan or home equity line of credit (HELOC) 

Home equity loans and home equity lines of credit are solid ways to tap your equity. If you want a lump sum, a home equity loan may be your best bet, but if you are unsure how much you’ll need, a HELOC might be a better fit.

Cash-out refinance

If you’ve paid off much of your home, a cash-out refinance could lower your monthly payment and give you access to extra cash. Here are some of the best mortgage refinance companies.

Sell your property

Selling your home can be an excellent option if you’re looking to downsize to a lower-maintenance property. The lower your loan balance is, the more you stand to make.

Share your home’s equity or appreciation

If you’re willing to share in your home’s eventual profits or gains in value, home equity sharing agreements can be a smart way to access fast cash. Under these agreements, an investor will give you a lump sum in exchange for a portion of your returns once the home is sold.

Sell and lease back your home

Several companies let you sell your home, take the profits, and lease it back month after month. You might even be able to purchase it back later if you’d like. You can use our guide to compare the best home sale-leaseback companies.

Reverse mortgages can help you convert your home equity into cash once income becomes scarce, but they’re not your only option as you age. Make sure you compare your full range of choices (as well as their costs) before moving forward.