Reverse mortgages, sometimes referred to as the loan where the lender pays you, are becoming more popular. Likewise, home equity is. According to an estimate by the financial company CoreLogic, rising house prices in the US resulted in homeowners gaining more than $3.2 trillion in home equity in 2021. Given the circumstances, reverse mortgages will likely continue to appeal to homeowners who want money.
Reverse mortgages are not for everyone, despite their growing popularity. You need to be aware of how they operate and what they demand in order to determine whether one is appropriate for you. Those who don’t have enough equity to make a reverse mortgage profitable or who would just prefer an alternative have other alternatives, it’s also important to note.
- Reverse mortgages are designed to provide elderly individuals with financial access by using home equity as collateral to borrow additional financing.
- The U.S. Department of Housing and Urban Development (HUD) states that you must be 62 years of age or older and either own the home outright or have paid down a “considerable amount” of your conventional mortgage to be eligible for a home equity conversion mortgage (HECM), a reverse mortgage backed by the federal government.
- Other choices include refinancing, downsizing, and receiving aid to cut your expenditures via accessible government programs if you don’t have enough equity to make a reverse mortgage feasible.
What Is a Reverse Mortgage?
Using the equity in your house as security for a loan is possible with a reverse mortgage. The whole loan will not be payable until the borrower dies, vacates the property for a period of more than 12 months, or sells the property, as opposed to making loan installments. Reverse mortgages are designed to make money available to seniors, giving them additional money for requirements like paying for healthcare and other necessities.
The federal government-backed reverse mortgage known as a home equity conversion mortgage (HECM) has been expanding its loan limitations. However, the most that someone may borrow from the U.S. Department of Housing and Urban Development (HUD) in 2022 is $970,800.
What Are Reverse Mortgage Requirements?
The most typical reverse mortgage, the HECM, has a number of restrictions, including that you be 62 or older, that the house be your primary residence, and that you have no federal debt. A reverse mortgage applicant must also go through counseling with a HUD-approved organization.
A 20th Century Invention
According to legend, Nelson Haynes of Deering Savings & Loan created the reverse mortgage in 1961 so that Nellie Young, a widow in Portland, Maine, may continue to live in her childhood home. The financial instrument has come under greater and more regulatory scrutiny as it has grown in use.
How Much Home Equity Do You Need?
How much equity you have in your house may be the most crucial factor in determining whether you qualify for a HECM. Unfortunately, it’s unclear how much money you really need to qualify for a HECM. HUD only states that you must be the sole owner of the home or have “paid down a significant amount.” According to the majority of financial advice, in order to be eligible for a HECM, you must hold at least 50% to 55% of the equity in your property. Additionally, you need to have enough cash on hand to cover recurring costs like maintenance, insurance, and property taxes.
The amount of equity in your property will determine how much you may borrow since the loan is backed by it. If you don’t own your property entirely, the money will be used to settle your outstanding debt on your mortgage first. The remainder will then be given to you as a lump amount, a line of credit, regular monthly payments, or a mix of the latter two.
What If You Don’t Have Enough Equity?
There are other options than reverse mortgages for releasing the equity in your house. There are other alternatives to think about if you want to convert your equity to cash but are not eligible for a reverse mortgage.
Home equity loans and home equity lines of credit are the first recommended alternatives to reverse mortgages by the Consumer Financial Protection Bureau (HELOCs).Property equity loans and HELOCs allow you to borrow money secured against the value of your home, similar to reverse mortgages. But they involve regular payments, unlike reverse mortgages. Even while they may ultimately be less expensive, they nevertheless significantly depend on equity.
What happens if you don’t have much equity to begin with? If that’s the case, you might:
- Refinance—This choice has to be carefully considered since it’s not always a good idea to refinance your mortgage. A refinancing, however, may be able to lower your interest rate, consolidate debt, and/or access equity.
- Get government assistance—If your issue is mounting debt, there are government programs that may help you with part of the payments. The U.S. Department of Health and Human Services’ Administration for Community Living, a federal assistance organization for aged and handicapped people, or your county or local tax office are also good places to look for them.
- Selling your house and moving to a smaller, less costly one may make sense if you really need money.
Can you sell a home that has a reverse mortgage?
Yes, but the reverse mortgage will then become payable. The debt will also be fully and immediately due if the final co-borrower passes away or vacates the property for more than 12 months in a row, a circumstance known as a maturity event.
Can you leave a home that has a reverse mortgage to your heirs?
Do you still own your home if you have a reverse mortgage?
Yes, as long as your name is still on the title. You are using your house as collateral for the loan, just as you would with a regular mortgage. But keep in mind that as a reverse mortgage matures, your debt increases while your equity in your property decreases.
The Bottom Line
Although it’s not the sole option, a reverse mortgage is a financial instrument that enables you to convert the equity in your house into cash. Consider the advantages and disadvantages thoroughly before making a decision to take one out.
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