How much money can you really get? Is the amount you can access worth it?
Potential Reverse Mortgage Borrowers Are Often Disappointed
If you were disappointed by your reverse mortgage loan amount, you are not alone. Most people feel kind of let down by the amount of cash they can access.
In fact, most potential borrowers ask, “if my home is valued at $300,000, why can’t I borrow that much?”
Like it or not, there are actually multiple reasons that you can borrow less than you might think:
Home Ownership: When you get a reverse mortgage you still own your home. Home ownership means that you need to retain at least some of your home equity stake. If you were to borrow the full value of your home, that would be more like selling your house — which you probably do not want to do.
Payoff Current Mortgage: A reverse mortgage can be the only loan on your home. If you are still paying off your traditional mortgage, then part of your reverse mortgage loan must be used to pay off that existing mortgage.
Flexibility: Borrowing only a portion of your home’s value leaves you with more flexibility in the future. These reserves give you access to additional options to: downsize, relocate or potentially leave an estate to heirs.
Hedge: The un-borrowed home equity is also a hedge to insure that you will be able to pay the loan back. When you got a traditional mortgage, the amount of interest you would pay was determined at the outset of the loan and you started making payments immediately.
For Many, Real Benefit of a Reverse Mortgage is NOT Actually Cash
You think reverse mortgage loan and the tendency is to focus on cash and how you want to spend money.
However, for many borrowers, the REAL benefit of a reverse mortgage has absolutely nothing to do with spending more money. The real benefits include:
Improved Cashflow: If you are still paying off your mortgage, perhaps the biggest benefit of a reverse mortgage is that it will eliminate this monthly mortgage payment. The reverse mortgage will pay off your existing mortgage and you will improve your cash flow every month.
This is not a one time infusion of cash, this is an ongoing monthly improvement to your budget!
Equity Reserves: Your equity reserve is the amount of money you still have in home equity. This can be a valuable source of security for your future.
A Backup Plan: Many people get a reverse mortgage and NEVER touch even a dollar of their loan amount. It is increasingly popular for people to secure a reverse mortgage and keep all of the loan amount in a home equity line of credit. You don’t pay interest on the money held in the line of credit and the amount you can borrow grows over time — allowing you to tap more of your equity later in life.
The idea is to have this money available in a relatively low cost account for emergencies and better financial decision making.
How Are Reverse Mortgage Loan Amounts Determined?
The amount of home equity you can access through a reverse mortgage generally starts at about 50% of the value of your home at the earliest age you are eligible for this product — 62. As you get older, the percentage you qualify for increases.
Your loan amount is determined by a variety of factors including: your age, spouse’s age (if applicable), interest rates and the appraised value of your home (or the FHA lending limit of $636,150 — whichever is less).
Will Reverse Mortgage Loan Amounts Increase or Decrease in the Future?
There is no predicting the future — especially these days.
However, there are a few things to watch if you are concerned about how much money you can get from a reverse mortgage:
Interest Rates: If interest rates rise, loan amounts are likely to decrease.
Home Values: If your home’s value falls, your potential loan amount will likely decrease.
Politicians: Reverse mortgages are regulated by Congress and the Federal Department of Housing and Urban Development. The future of the program lies in their hands.
Do This to Figure Out the Potential of a Reverse Mortgage Loan
Many reverse mortgage calculators give you one number that represents your loan amount. However, they may or may not be telling you how that money is going to be used and whether or not you will have access to it. For many of the reasons outlined above, most borrowers do not get access to their full loan amount.
The NewRetirement reverse mortgage calculator is different. It helps you understand your total loan amount and how much of that money will be:
- Used to pay off an existing mortgage
- Remaining as home equity
- Usable as cash or a home equity line of credit (You can also learn by how much this line of credit would grow over time.)
Understanding how your loan amount is allocated and the benefits of each bucket of money will help you assess the real pros and cons of this loan for your situation.
Is a Reverse Mortgage Right for You?
If you want to stay in your existing home and any of the following is true, then a reverse mortgage is worth a serious look:
- You need to improve your financial situation
- You would like to increase your financial flexibility
- You would like to have a back up plan