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A reverse mortgage allows older homeowners to draw on their home equity without having to make monthly payments. It works opposite to how a traditional mortgage does; rather than paying down the balance over time, reverse mortgage borrowers actually owe more month over month, factoring in interest. The loan doesn’t come due until the house is sold or the owner passes.
You can expect to need at least a 50% equity stake in your home to use a reverse mortgage, though the exact share varies by lender and the specific reverse mortgage program you’re using. Generally, the more equity you have in your property, the more cash you’ll be able to access through a reverse mortgage product.
On this page:
- There are several types of reverse mortgages
- How much equity you need to qualify for a reverse mortgage
- Other eligibility requirements
- Other important information
- Risks of reverse mortgages
- What to do you if you don’t qualify
There are several types of reverse mortgages to choose from
- The most common is the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA) and is available to homeowners 62 and older.
- There are also single-purpose reverse mortgages, which can be used for one reason only (to cover home repairs or medical bills, for example). These are available through non-profits, as well as state and local government agencies.
- Finally, there are private reverse mortgages, which are offered by private lenders and may provide more of a cash advance on your home’s value, though they usually have more stringent qualifying requirements.
How much equity you need to qualify for a reverse mortgage
If you’re considering a HECM, the Consumer Financial Protection Bureau recommends either owning your home outright or having a “low mortgage balance.” Typically, you can expect to need an equity stake of at least 50%—meaning your balance is less than half of your home’s current value.
Here’s something you’ll want to consider when thinking about equity: Your reverse mortgage will be used to pay off your existing mortgage balance first before you can ever take cash out of the home. The lower that balance is, the more of your equity you’ll be able to tap.
In a nutshell: If you’re on the fence about whether you qualify, waiting a few more months or years could help significantly.
The amount you can borrow from your equity depends on your age and the interest rate for which you qualify. For a HECM loan, this amount ranges from 47.9% to 75% of your equity, but you’ll also need to include closing costs—so the amount you take home is usually quite a bit less than that.
Let’s look at a few scenarios to see how your equity stake can impact your access to cash:
- John owns his home outright and it’s currently valued at $250,000. At age 65, he’d qualify for about 48% of his equity via a HECM, minus his closing costs. Ultimately, he could get just under $110,000.
- Sherri, also 65, has paid off 60% of her home, currently valued at $250,000. That puts her equity stake at $150,000, so after accounting for closing costs, she could take in about $65,550 from a HECM.
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’ll be able to 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 will not be eligible.
Other eligibility requirements include:
- The home must be your primary residence. You have to live there for the majority of the year.
- Your property must remain in good condition. The lender needs to know they can sell it at full market value to pay off the balance.
- You have to be current on all federal debts (if applying for a HECM). This means you can’t be behind on student loans or owe any tax debts to the IRS.
- You may need to complete reverse mortgage counseling before approval. This is required when applying for a HECM and may be required by other lenders.
- You have to prove you have the financial resources to cover the costs of homeownership. This includes taxes, insurance, HOA dues, and more.
You’ll also have to pay for mortgage insurance. If you’re taking out a HECM, you’ll need to cover an upfront and annual mortgage insurance premium. The exact costs changed in October 2017, clocking in at 2% upfront and 0.5% of the balance annually.
Other important information about reverse mortgages
One of the good things about reverse mortgages is that they 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 some flexibility in how and when you can use them.
A few other things you’ll want to note about these mortgage products:
- There are no monthly payments. Your loan isn’t due until you no longer live in the home, so the balance (plus interest) will either be paid off when you move and sell the home or when your estate or heirs sell the property.
- Your loan balance goes up over time. 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.
- You still need to pay for property taxes and homeowners insurance. Most mortgages include taxes and insurance as part of the monthly payment, but since reverse mortgages don’t come with monthly payments, you’ll be responsible for these on your own.
You can find reverse mortgages through a number of mortgage lenders. Check out our guide to compare the best reverse mortgage companies.
Risks of reverse mortgages
While reverse mortgages can be a tempting option if you’re on a limited income, they’re not without risks. Here are just a few of the 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, so if your spouse is on the loan and passes away, you would need to repay the balance immediately or face eviction.
- You can’t leave home for an extended period of time. Remember that reverse mortgages require the home to be your primary residence and as such, many come with stipulations about 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 owing your full loan balance much sooner than you expected.
- If home values drop, it could mean owing more than your property is worth. This might leave your children or heirs footing the bill for the remaining balance.
Finally, reverse mortgages can be expensive. They often come with high fees and origination charges, meaning they’re usually not the most affordable way to tap your home equity.
What to do you if you don’t qualify for a reverse mortgage
If you don’t meet the age requirements, have much equity, or otherwise qualify for a reverse mortgage, you have other ways to tap your home for cash.
- Get a home equity loan or home equity line of credit (HELOC). Home equity loans and home equity lines of credit are also good ways to tap your equity. If you want a lump sum, a home equity loan may be your best bet, but if you’re not sure how much you’ll need, a HELOC is likely a better fit.
- Consider a cash-out refinance. If you’ve paid off a lot of your home, a cash-out refinance could lower your monthly payment and give you access to extra cash in the process. Here are some of the best mortgage refinance companies.
- Sell your property. Selling your home can be a good option, too, especially 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 leaseback your home. There are a number of companies that let you sell your home, take the profits, and lease it back month over month. You might even be able to purchase it back later on 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.
Author: Aly Yale