If you've paid your home off – or if you nearly have – there may be several good reasons why you don't want to leave all that equity tied up in a non-liquid asset. Home equity conversion mortgages – also called reverse mortgages – give you cash for the equity in your home. There are no rules or restrictions on what you can do with the money. You can invest it, take an extended vacation abroad, or use it for necessaries. You can take it as a lump sum, as a line of credit, in regular monthly installments, or through a combination of these options. Best of all, the money is tax-free.
You generally need a lot of equity to make a reverse mortgage work. Although there are no specific dollar limits, the best candidates for reverse mortgages have either paid their homes off or they have only a small mortgage balance remaining. If you do have an existing traditional mortgage, your reverse mortgage pays it off and that balance is incorporated in what you borrow. If you have a significant mortgage balance, this would result in minimal cash out, which may negate the purpose. You can't take out all of your equity, but the more you have, the greater the available money from your reverse mortgage.
Amount of Loan
Typically, you can take about 80 percent of your equity in a reverse mortgage. There must be enough left over to cover closing costs, which are due in advance and can run as much as 5 percent of your home's value. Loan amounts can increase due to a variety of factors, including your age, your home's fair market value, and mortgage insurance premiums. The older you are and the more your home appraises for, the more equity you can typically take out. If you're married and hold title to your property jointly, reverse mortgage lenders go by the age of the youngest spouse.
In addition to having sufficient equity, qualifying for a reverse mortgage involves some other factors as well. Under federal law, you – or your spouse – must be at least 62 years old. You must live in your home – you can't take out a reverse mortgage on a rental or investment property. Your income typically isn't a factor.
A reverse mortgage differs from a traditional mortgage or a home equity loan in that you don't have to pay it back in monthly installments. The money is yours until your death, until you move out of the home, or until you sell it. At this point, the entire balance comes due, which typically necessitates selling the home if you've decided to move out or you die. You do have to continue paying property taxes and homeowners hazard insurance; these aren't incorporated in the loan. At the time of repayment, you – or your estate – must also pay the interest and finance charges on the loan. If there's anything left over after sale of the property, these funds are returned to you or to your estate.
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