How do Reverse Mortgages Work

How do reverse mortgages work and how much can I borrow?

How do reverse mortgages work and how much can I borrow?

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Reverse mortgages can be valuable tools for seniors trying to supplement retirement incomes, especially in an age where pensions and social security may not cover living expenses.

In the US, the borrower of a reverse mortgage must be at least 62 years old. Typically reverse mortgages end when the homeowner dies, sells the house, or moves out of the house for 12 consecutive months, or at the end of the Term on a Term plan. This could be any amount of time.

A healthy 62 year old could have a life expectancy of another 20-30 years so be sure to understand the terms of the reverse mortgage before signing. For example, is it a Tenure plan, which pays fixed payments until you die or move from the premises, or is it a Term plan, paying fixed monthly payments only for a fixed amount of time? If it is a Term plan, be sure you have a plan for what to do after the term runs out.

The amount you can borrow is determined by your age, the value of the property and the interest rate. If you are relatively young, you will not be able to borrow as much against your house in a reverse mortgage. What this means is that under a Tenure plan, the payments you receive may be very low. While under a Term plan, you may outlive the term.

Closing costs on reverse mortgages are high relative to home equity lines of credit – therefore if you are planning on moving within only a few years, the benefits of a reverse mortgage may not be worth the costs.  In addition, it is not a good idea to use the proceeds of a reverse mortgage to invest in risky investments.

One other thing to consider is to be careful that the cash from the reverse mortgage doesn’t affect your eligibility for any public/government benefits you receive – talk to a financial advisor to make sure you are in compliance.

If you would like more information, please visit our mortgage resource section.

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  • 35x35
    Nov, 2007
    brad
    You are above the age limit of 62, however, it is recommended that you have little to no mortgage. You should certainly apply to see if you can qualify, but typically you qualify with a much lower LTV (or no loan to value). Here is the HUD description of the reverse mortgage product: HECM can be used by homeowners who are 62 years of age and older. The total income that an owner can receive through HECM is the maximum claim amount, which is calculated with a formula including the age of the owner(s), the interest rate, and the value of the home. For example, on the basis of a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85-year-old could borrow up to 56 percent. Here is a great calculator on reverse mortgages from the AARP site: http://www.rmaarp.com/ Good luck!
    1 Votes

  • 35x35
    Nov, 2007
    Fred
    I own a one family home in Tamarac Florida, my mortgage is $135,000 and the house has been appraised for $200,000.I am 63 years of age and my question is would I be able to qualify for a reversed mortgage.
    1 Votes

    • 35x35
      Jan, 2012
      Chris
      With the information above you will most likely qualify - but the equity can be the issue - so an appraisal is necessary you can learn more about the program.
      0 Votes