For those who are at least 62 years old, taking out a reverse mortgage is one way to supplement your income in your retirement years. As long as you live in the home and have a decent amount of home equity, you are likely to be eligible.
However, these programs can be complicated and are not right for everyone. That’s why you should understand all the details before you make a decision.
Below, we explain how a reverse mortgage works, including how much it pays and how much it costs.
How Much Does a Reverse Mortgage Pay?
The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your home’s equity. As of 2018, the maximum amount anyone can be paid from a reverse mortgage is $679,650. However, most people will be paid much less.
The exact amount the reverse mortgage will pay you depends on a few different factors, including your age, the current home value, and your interest rate. The chart below shows how much of a difference these factors can make it determining the amount of equity you can tap into:
|4% interest rate||5% interest rate||6% interest rate|
|65 year old borrower||49%||43%||38%|
|90 year old borrower||69%||65%||62%|
Maximum percentage of home equity that can be borrowed in a HECM (Source)
What Are The Different Types of Loan Payout Options?
When you get a reverse mortgage, you can choose how you want the loan amount paid out. That means you can get monthly payments or take it all in one lump sum.
Beyond that, there are other variations you can choose as well. You could choose a hybrid option, which includes both an upfront lump sum as well as monthly payments. Or you could choose a line of credit, where you can withdraw money as needed, up to a certain limit. It all depends on what you think will be the best fit for your unique situation.
How Does Your Payment Method Determine How Much You’ll Get Paid?
On the surface, it doesn’t seem like the payment method would affect how much you can get. However, getting paid out in one lump sum versus monthly payments could affect the principal amount of your loan. Keep reading to understand why.
Getting the entirety of your reverse mortgage amount all at once means you could be giving up some money in the future, whereas both the fixed monthly payment option and the line of credit option could pay out more to you over time if your home value goes up.
What Are the Costs of A Reverse Mortgage?
Because a reverse mortgage is a loan, there are various costs associated with taking one out. These include interest on the loan, the origination fee, and any set aside fees. Set aside fees include expenses such as getting your home appraised and making any repairs necessary to get your home approved.
An appraisal can cost anywhere from $250 to $1,000 depending on the size of the home and any complications that arise.
Interest rates fluctuate over time, but currently hover around 5%. That means you’ll be charged around 5% of the loan value every year – but you won’t need to pay this immediately. Instead, it will be assessed at the end of your loan term or when you sell the home.
The origination fee is charged by the lender to cover their cost of processing your loan application. Usually the origination fee is equal to 2% of the first $200,000 of your home’s value and 1% of any amount above that, with a maximum of $6,000. If your home is worth $125,000 or less, the origination fee cannot exceed $2,500.
Here’s an example. If your home is valued at $350,000, you might expect to pay the following origination fee:
$200,000 x 2% = $4,000
$150,000 x 1% = $1,500
How to Tell If It’s Worth It
Only you can tell if the costs of taking out a reverse mortgage are worth it and decide how you want the amount paid out. It’s a good idea to find an online reverse mortgage calculator and plug in some numbers to see whether the benefits outweigh the cons.
Before taking out a reverse mortgage, you should consider alternatives like the Unison HomeOwner program. This program allows homeowners to unlock their home equity without monthly payments or interest charges. Instead, Unison invests alongside you in the home, sharing a portion of any future change in the value of the home whenever you sell it – up to 30 years later. If your home increases in value, the company shares the gain. If your home decreases in value, the company typically shares the loss. You can learn more here.
No program will be right for every homeowner. But if you’ve done your homework and can ensure you’ll be a responsible homeowner, tapping into your home equity could be well worth it.
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