By Rudri Bhatt Patel
Published Mon, Jan 17, 2022
A reverse mortgage allows borrowers to tap the equity in their homes as a lump sum payout, regular payments, a line of credit, or a combination of the three. There is no single answer to how much money will be available to reverse mortgage borrowers because the amount differs for everyone. The following factors are what lenders will use to determine how much money a reverse mortgage borrower will be eligible to take out of their mortgage.
To qualify for a home equity conversion mortgage (HECM) or government-backed reverse mortgage, a borrower has to be 62 years or older. The age limit for a proprietary reverse mortgage varies, but the borrower typically must be at least 55 years old.
The younger you are when you apply for a reverse mortgage, the less money you will likely receive. That’s because payouts of a reverse mortgage are based on life expectancy. The general assumption is that younger borrowers will have the mortgage for a longer period. Older borrowers are more likely to have the loan for a shorter period.
Reverse Loan Type
There are specific lending limits depending on the type of loan you choose. For a HECM, the Federal Housing Administration (FHA) caps the lending limit at $1,089,300 in 2023. A proprietary loan from a private lender may have higher limits determined by the lender. Some lenders offer lending limits of $4 million or more. The type of loan directly correlates to the size of the payouts you’ll be eligible to receive.
A reverse mortgage, like any loan, accrues interest. Generally, the higher the interest rate, the less money will be available for the borrower to take out. This is because the interest payments on a reverse mortgage add to the principal and compound over time.
Since you aren’t expected to make monthly payments on a reverse mortgage, the interest will add to the loan balance and grow over time. When calculating proceed limits, the lender will calculate the amount of interest likely to accrue over the life of the reverse mortgage. They will subtract that amount from the available principal.
Current Mortgage Amount
Using a reverse mortgage to pay off an existing mortgage will impact the proceeds available as payouts. Loan proceeds will be used to pay off the existing loan first. The lender will then determine available proceeds based on the equity remaining in the home.
Home Value and Equity
Lenders will appraise your home to determine its value. The greater the house’s value and the more equity the borrower has, the higher the likely payout amount. Lenders look at equity to determine the risk of giving a borrower credit. A way to measure risk is through the loan-to-value (LTV). This formula calculates the ratio between the requested loan amount and the home’s current market value. The lower the LTV, the larger the amount of available proceeds.
Money for a LESA Account
The lender conducts a financial assessment to determine if a borrower can meet the financial requirements of a reverse mortgage. If the lender determines the borrower will have difficulty, they can set up a life expectancy set aside (LESA). The LESA sets aside enough loan proceeds to cover the borrower’s property taxes. It protects lenders from borrower defaults and helps ensure borrowers can meet their loan obligations. Having a LESA will impact the proceed amounts the borrower receives.
Closing Costs and Fees
Different lenders have various closing costs and fees. Many borrowers will roll these costs and fees into the reverse mortgage loan amount. “Rolling in” means these fees will be covered by loan proceeds and lower the amount available to the borrower as cash. Borrowers who don’t wish to have their available proceeds lowered can choose to pay for these fees and costs out of pocket.
Increasing Cash Flow
In addition to accessing their funds, reverse mortgage borrowers are not required to make monthly mortgage payments. Property charges, including property taxes, fees, and hazard insurance, still apply. When determining how a reverse mortgage will impact your financial situation, removing a monthly mortgage payment is worth including in your calculations. Though not technically mortgage proceeds, this feature of a reverse mortgage can lessen a borrower’s monthly spending obligations and increase their cash flow even before they take proceeds out.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.