How Much Equity Do You Need for a Reverse Mortgage?

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How Much Equity Do You Need for a Reverse Mortgage?

If your retirement budget seems a bit tight, a reverse mortgage can be a good way to boost your balance sheet’s cash flow. However, are reverse mortgages accessible to all borrowers? No, not always. Your home’s equity is one of the most important variables in evaluating whether you qualify for a reverse mortgage. Are you able to borrow money against adequate equity?

Key Takeaways

  • To qualify for a reverse mortgage, you must have equity that may be used as collateral.
  • According to the U.S. Department of Housing and Urban Development (HUD), you must either have paid down a “substantial portion” of your mortgage or own your property entirely.
  • The amount you are eligible to borrow depends on your age.

How a Reverse Mortgage Works

Reverse mortgages are types of mortgages that let homeowners over 62 use the equity in their main houses as collateral to borrow money. The lender pays you in monthly installments, a lump amount, or a line of credit rather than making payments to the bank to gradually acquire full ownership of the home. When you sell your house or when you die away and your heirs sell it, the reverse mortgage is paid off.

There are three different types of reverse mortgages:

The most typical reverse mortgages are HECMs, which have the most definite requirements. Here, we’ll talk about how much equity is required for a HECM.

Your equity is calculated by both the amount you have spent for your present home and its current value. Your equity will be bigger if you’re still making mortgage payments but your home has increased in value due to a healthy property market.

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Finding Your Equity

You need to know how much equity you have in your house since reverse mortgages borrow against that equity. An appraisal to determine your home’s current value is a required step in the application process for a HECM.

Once the house’s market value has been established, calculating your equity is simpler. For homeowners who own their houses entirely, the solution is simple: they have 100% equity. Less than that if you’re still making mortgage payments.

Variable Equity Standards

Unfortunately, there is some confusion over the amount of equity needed to be eligible for a HECM. A often stated general guideline is that you must have 50% equity in your property to be eligible. The U.S. Department of Housing and Urban Development (HUD), however, is less specific about what is needed.

HUD states that homeowners must either own their homes entirely or have made “considerable” down payments. With that flexibility, the equity requirement is simply one part of the requirements for approval; other factors include the borrower’s age and history of financial responsibility.

FHA-approved lenders take into account each of these characteristics when evaluating the amount of money you may access, even though there isn’t a readily published framework for how they effect approval. HUD limits the amount of money anybody may borrow to $970,800 for 2022, regardless of equity.

How much can I borrow through a reverse mortgage?

Your age, interest rate, and the lesser of the property’s assessed value or the Federal Housing Administration’s (FHA) home equity conversion mortgage (HECM) limit will determine how much you may borrow. For every individual, this will be different. Typically, older persons are eligible for larger loans.

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More money may be borrowed the lower the interest rate. This will prevent using up all the equity in the property before you relocate or die away since the interest will be paid when the house is sold to pay off the reverse mortgage.

How do I determine my equity?

Your home’s equity is calculated as its current assessed worth less the balance of your mortgage. Your equity may rise or fall depending on the assessed value of your house since home prices fluctuate depending on the state of the market. Your equity will rise even while your payments remain the same at a time when house prices are high. In contrast, if there is a housing crisis, your equity may decrease as your house, your investment, loses value.

What happens to leftover equity when my home is sold?

If you have a reverse mortgage on your home and don’t utilize the whole amount of equity before you die away or leave, you or your heirs may retain the balance as profit when the house is sold. Mortgage insurance payments are used to cover any expenditures that go over the total amount of equity. With a HECM, you cannot owe more than the house is worth.

The Bottom Line

In your retirement years, having equity in your house is a crucial asset, particularly if you’re thinking about getting a reverse mortgage. Reverse mortgages are exclusively offered to seniors, thus a sizable equity cushion is expected. Other alternatives, such a home equity line of credit (HELOC), can be beneficial if you bought your house more recently and don’t have enough equity built up.

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