If you own a home for a long time, you’ll build up equity through the principal payments and general appreciation. This equity in your home is an asset that can be used, as needed, in a variety of ways:
- You can sell your home and downsize, using the proceeds for rent or a less expensive home.
- You can borrow against the equity with a HELOC, or a home equity line of credit.
- Or you can get a reverse mortgage.
A homeowner who is 62 and older and has considerable home equity (at least 50%) are eligible to borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line or credit.
Unlike a forward mortgage — the type used to buy a home — a reverse mortgage doesn’t require the homeowner to make any loan payments. Instead, the entire loan balance, up to a limit, becomes due and payable when the borrower dies, moves out permanently or sells the home.
A reverse mortgage allows you to continue to own your home as you age, as long as you keep up with property taxes, maintenance and insurance and don’t need to move into a nursing home or assisted living facility for more than a year.
There are three types of reverse mortgages:
- Home equity conversion mortgages (HECMs), which is likely to be more expensive than a traditional home loan because of mortgage insurance that protects all parties involved. It is the most widely used reverse mortgage because it carries no income limitations or medical requirements, and the loan can be used for any reason.
- A single-purpose reverse mortgage is the least expensive option. It’s offered by state, local and nonprofit agencies who specify the reason for the reverse mortgage. Homeowners can use single-purpose reverse mortgage proceeds only to pay for a specific lender-approved item, such as necessary repairs to the home, or property taxes.
- A proprietary reverse mortgage is used for a larger advance for a home appraised at a high value.
For all types of reverse mortgages, the amount you can borrow will be based on the youngest borrower’s age, the loan’s interest rate and the lesser of your home’s appraised value or the FHA’s maximum claim amount, which is $822,375 as of January 1, 2022.
There’s more to learn about reverse mortgages. If you’re interested in speaking with our advisors about how this tool can fit into your financial plan, or would like a recommendation for a loan officer, schedule a call below.
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