Curious about how much money you get from a reverse mortgage? Keep on reading to discover factors that affect your mortgage loan amount.
For homeowners 62 and older, a reverse mortgage can be an effective way to access home equity without selling the home. This home equity can be applied toward day-to-day expenses and healthcare costs, supplementing –– and even replacing –– your retirement income. But unlike selling your home through a traditional sale, this home equity must eventually be paid back. Also different from a sale is that you won’t receive every penny of your home equity. So, exactly how much money do you get from a reverse mortgage?
The answer will depend on a variety of factors and variables, making the amount of money you receive as unique as your fingerprint. Read on to learn more about how reverse mortgages work and how the amount you’ll receive is decided. As you read, you’ll find there are several reverse mortgage pros and cons to consider related to their functions and payout options.
Reverse mortgages allow homeowners –– those 62 or older who own at least 50 percent of their home –– to borrow against the equity in their homes in exchange for lump-sum or monthly payouts.
So, how do you pay back a reverse mortgage? Rather than paying the loan proceeds back in the form of monthly payments, a reverse mortgage is repaid when the home is sold or when the borrower passes away. In the meantime, the home loan collects interest while the balance rises. This can result in the loan balance getting out of hand, with some borrowers (or their heirs) being unable to repay.1
Inflating loan balances have earned the reverse mortgage a less-than-stellar reputation in the half-century since its inception. But homeowners who go into a reverse mortgage fully prepared and well-read may be able to wield this tool as a force for good.
The more you borrow in a reverse mortgage, the larger your ultimate balance will be. Exactly how much you can borrow comes down to a few important factors.
The most important factor in determining how much money you’ll get from a reverse mortgage is the home’s current market value. With that said, it’s wise not to log onto Zillow for your home’s estimate and assume that’s what you’ll be able to borrow. The initial principal limit –– the maximum amount a borrower can receive from a reverse mortgage loan –– typically caps out at 60 percent of the home’s value. This means that under perfect circumstances, borrowers may access 60 percent of the home’s value, though the actual amount will likely be less.2 Still, the higher a home’s current market value, the larger this percentage will be. The home’s value serves a dual purpose, as it is also used to calculate available home equity.
The age of the youngest borrower has a similar impact on the amount you’ll be able to borrow through a reverse mortgage. And, while seemingly innocuous, the particular language used here is worth noting. Like traditional mortgages, reverse mortgages can have a single borrower or multiple co-borrowers. These borrowers can be spouses, family, or even friends, so long as each borrower meets the minimum qualifications for a reverse mortgage. But it’s the younger of these two borrowers that will play a key role in determining how much money you’ll get out of a reverse mortgage.
Because lenders base their decisions on risk –– and older borrowers are more likely to have shorter loans –– the older the borrower, the higher the loan amounts they’ll likely be able to access.
There’s more than one type of reverse mortgage. In fact, there are several –– each with its own set of unique qualifications, benefits, and protections. The most common of which is the home equity conversion mortgage (HECM loan). An HECM reverse mortgage allows you to access 40 to 60 percent of your home’s value. A single-purpose reverse mortgage, on the other hand, is designed to cater to a single, agreed-upon need, meaning the amount you can access from this reverse mortgage will likely be significantly less.3
Interest rates are inescapable, and they can be as important with a reverse mortgage as with a traditional mortgage. A higher interest rate will mean you’ll end up owing more at the end of the loan, making the loan riskier from a lender’s perspective. A lower interest rate has the opposite effect. Therefore, if interest rates are lower when you’re applying for a reverse mortgage, you may be able to get more money than if interest rates were higher.
Knowing what variables impact the potential payout, you can begin crunching the numbers to get a better idea of how much money you’ll get from a reverse mortgage lender.
Let’s take a look at how much two different borrowers could get out of a $400,000 home –– assuming both homeowners had full home equity. On this property, a 62-year-old borrower could get just over $176,000 at most, or 44 percent of their home’s value. On the same property, a 72-year-old homeowner could access a maximum home value of $196,000: a $20,000 and five percent difference.4 Current interest rates and the type of reverse mortgage will have a substantial impact on these actual amounts, but this gives you a clearer idea of how crucial age is when applying for a reverse mortgage.
In many ways, interest rates and housing prices are partners in a never-ending economic dance. When the housing market is hot, and housing is in demand, prices tend to rise to reflect competition from buyers. But at a certain point, interest rates will rise, too –– reducing demand and lowering housing prices.
Considering the impact interest rates and your home’s value will have on the amount of money you’ll be able to get from a reverse mortgage, it will be crucial to follow these patterns closely as you explore your reverse mortgage options. Striking at just the right time, when rates are low and prices are high, you’ll be able to get the maximum amount out of your home.
Reverse mortgages won’t be the best choice for every homeowner. But for those who have found a reverse mortgage to be the right fit, the benefits are clear. These perks won’t manifest themselves, however –– and getting the most out of your reverse mortgage while reducing your risk will require some strategic planning.
We’ve answered the question, “How much money do you get from a reverse mortgage?” but there’s another one worth asking: “How much money should you get from a reverse mortgage?” In most cases, that answer is as little as possible and only what you need. The comfort and flexibility that reverse mortgages provide today come at a future cost, and borrowing as little as possible will help ensure that you or your heirs are not in an uncomfortable position down the road. In other words, you’ll get all of the pros of a reverse mortgage with few of the cons.
In step with borrowing only what you need, putting together a comprehensive budget will also help you maximize the benefits of a reverse mortgage. This will ensure the reverse mortgage proceeds are properly allocated toward life’s necessities –– helping you live more comfortably for longer. Whether your reverse mortgage is subsidizing your retirement fund or replacing it, a budget will help you get the most bang for your buck. Discover how to start a budget in our guide.
Our circumstances change as we age. We can either be caught off guard by these changes, or prepared for them. When you borrow from your home equity through a reverse mortgage, think not just about your needs today but also your potential needs five, 10, or 15 years from now. Consider long-term care costs and expenses related to aging-in-place home modifications when entering into a reverse mortgage, guaranteeing you have the funds to cover your care as your needs evolve. There’s no way to know for certain what the future holds. But preparing for any change will help you make the right decision today to set yourself up tomorrow.
Reverse mortgages can create comfort, flexibility, and stability for older homeowners –– but there are more than a few ways to achieve these same goals. As you conduct your own research on reverse mortgages, consider these alternatives.
Like reverse mortgages, home equity loans allow you to borrow from your home equity and repay (with interest) it at a later date. But rather than repaying when the home is sold or when the last living borrower passes away, the repayment process begins immediately after the loan is disbursed. This payment is distributed as a lump sum, meaning you’ll have to know precisely how much money you need before applying for a home equity loan.5
A home equity line of credit (HELOC) works more like a credit card –– allowing you to borrow against your home equity up to a set limit during a certain window. For the duration of this “draw” period, borrowers make interest-only payments. When this period ends, however, after a decade or so, repayment is due on both the principal and interest. A line of credit can offer more flexibility than a set home equity loan, but it can also require more discipline to manage.
There are countless reasons why older homeowners opt for a reverse mortgage. And if your primary motivation is to lessen the burden of your existing mortgage, you can accomplish the same goal by refinancing. Can you refinance a fixed rate mortgage? This alternative strategy only works if you still have a mortgage on your home. But by refinancing to a lower interest rate, you may be able to reduce your monthly payments and free up cash to be used elsewhere.
Ultimately, you may find that the best way to create financial flexibility in retirement is by selling your current home and moving into a smaller, less expensive one. Parting with a cherished home is never easy, but there are many benefits to downsizing:
Plus, you can use your additional equity from the sale to support your retirement fund and bask in the shine of your golden years.
One major benefit of a reverse mortgage is that homeowners can remain in their homes. But often, the knowledge that moving out will mean repaying the loan can leave these homeowners feeling trapped. Truehold’s sell and stay transaction solves this problem, allowing homeowners to access their home equity –– and remain in their homes as renters. We'll cover essential repairs, property tax, and property insurance, so that you can enjoy the home you know and love without the hassle.
With your home equity in hand, you can use the funds however you'd like! Whether that's regaining financial security, buying a dream home, funding a venture, or just having extra cash on hand in your daily life. The possibilities are endless when you trade your monthly mortgage payment for life as a renter with a sell and stay transaction.
A reverse mortgage can be a great way to leverage home equity for a more comfortable retirement. However, getting the most out of this strategy will require some work –– including thoughtful budgeting, forward-thinking, and objective research. Fortunately, a reverse mortgage is far from the only way to access your hard-earned home equity.
With Truehold’s sell and stay transaction, there’s no repayment, there’s no minimum age, and there’s no rush for you to move out –– making this one of your best alternatives to a reverse mortgage. Experience the full benefits for yourself by connecting with one of Truehold’s representatives today.
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