The 60% Utilization Rule
Home equity conversion mortgage HECM borrowers may only take the greater of 60% of their total available equity or the total amount of their mandatory obligations plus 10% in the first payout.
If the reverse mortgage balance is higher than the home is worth, the best option is for the surviving spouse to keep living in the house—selling or letting the mortgage lender foreclose will leave the survivor with no place to live and no cash from the home.
Since the mortgage lender will not receive any payments during the reverse mortgage draw period, they charge interest and fees that reduce your home equity. As a result, you can't convert all of your home's equity to cash since the lender allocates a portion of your equity as compensation for servicing the loan.
If your home is worth more than you owe, you are not likely to have a problem. But if you owe more on your mortgage than the current value of your home, your mortgage could make a traditional sale impossible.
INCREASED HOME VALUES LEAD TO HIGHER EQUITY
While increased equity in a home benefits homeowners in many ways, increased home values also mean higher taxes, which could mean a higher monthly payment for borrowers who choose to escrow their taxes and insurance.
When we buy a house, we like to think that it's ours, but the reality is that we share ownership with the bank until the mortgage is paid off. At the time of the sale of your house, after paying off the loan and subtracting other selling costs, the remaining figure is your equity.
If your reverse mortgage loan is in default and you've received a notice that the loan is “due and payable,” you may sell your home for 95 percent of its appraised value.
Suze Orman's opinion on reverse mortgages
She has spoken out against these loans on numerous occasions, warning that they can be a risky financial decision for many older Americans. One of Suze's main concerns with reverse mortgages is that they can be incredibly expensive.
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
If the value of your home rises, you could increase the amount that you receive from your reverse mortgage. Refinancing for a new reverse mortgage entails costs. You may want to refinance a reverse mortgage to tap more equity, get a better interest rate or add a spouse to the loan.
A reverse mortgage usually must be repaid when the borrower moves out for 12 consecutive months or more, such as into a nursing home or other care facility. If the borrower is married, their spouse can remain in the home under certain conditions.
With a reverse mortgage, the title of the home remains in the borrower's name. Proceeds from a reverse mortgage can be used as a down payment on a second home in some cases , or help supplement retirement income to cover monthly expenses.
You're protected if the balance exceeds your home's value
However, because a reverse mortgage is what's known as “non-recourse” financing, the amount of debt that must be repaid can never exceed the property's value. That also means the lender can't make any claims against your other assets or those of your heirs.
Reverse mortgages require the borrower to use the property as the primary residence for the lifetime of the loan.
Alternatives to a reverse mortgage include home equity loan, home equity lines of credit, and cash-out refinances. These financial products can help you tap the equity in your home to use as cash for other purposes.
Reverse mortgages are extremely expensive and should only be used as a loan of last resort. Borrowers must pay both upfront and ongoing fees. The ongoing costs are often financed into the loan and seniors may be unaware of just how quickly the fees add up.
A reverse mortgage may be a good idea if:
You and your spouse/partner are both 62 or older. You are in a strong financial position. You are able to physically maintain your home.
When you have a reverse mortgage, you retain title to the property and are free to sell it anytime you see fit. However, the reverse mortgage loan becomes due if you decide to sell, so be sure your home's current value (or your savings account balance) is high enough to pay off the loan and cover the closing costs.
The amount of money you can get from a reverse mortgage usually ranges from 40% to 60% of your home's appraised value. The older you are, the more you can receive because loan amounts are based on your age and current interest rates. Several factors determine the loan amount: The age of the youngest borrower.
What Is a Good Amount of Equity in a House? It's advisable to keep at least 20% of your equity in your home, as this is a requirement to access a range of refinancing options. 6 Borrowers generally must have at least 20% home equity to be eligible for a cash-out refinance or loan, for example.
If you owned and lived in the home for a total of two of the five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return). If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a capital gain on Schedule D.