A reverse mortgage works opposite the traditional mortgage. It’s a program for homeowners that have retired and could use the equity in their home to live. Rather than selling their home and downsizing, homeowners can ‘age in place’ while enjoying the equity in their home while they are still alive.
You don’t have to pay off a reverse mortgage until you sell the home or pass away. Then it’s the responsibility of your estate to pay the mortgage off in full. While this sounds like a great program, there are things you should know about it, including how much equity you need to qualify.
The Right Amount of Equity
The ideal candidate for the reverse mortgage is the homeowner that owns his home free and clear. In other words, we mean homeowners that don’t have a mortgage on their home and own it 100%. If you have a small mortgage on your home, you may still be a good candidate, just know that the proceeds from the reverse mortgage will be used to pay off your balance. You are then free to take the remaining cash and do with it as you see fit.
Getting the Reverse Mortgage
Once you know that you are a good candidate for the reverse mortgage, you have to determine how much you want to borrow. On average, lenders allow homeowners to take out as much as 80% of the home’s value. In other words, you can’t take out the full value of the home in a reverse mortgage. You have to leave a little bit there for the bank should something happen.
You aren’t obligated to take the full amount, though. You can take out as little or as much (up to 80%) as you want. The lender also doesn’t ask what you will use the funds for – it’s up to your discretion. The biggest issue is that you continue to make your homeowner’s insurance and real estate tax payments. You must also continue to maintain the home. If you can’t prove that you have the money to keep up with the home, the reverse mortgage may not be an option for you.
You are best off if you have 100% equity in your home to get a reverse mortgage, but even as little as 50% to 75% may qualify, depending on the lender. The best case scenario is that you own the home free and clear and are using the equity to enjoy your golden years.