Saving up for retirement is something that everyone should start working towards the moment they enter the workforce. But it’s not as easy as it sounds. Life can throw curveballs at us, from unexpected medical emergencies to a sudden job loss. And with so many baby boomers reaching retirement age over the recent past and into the foreseeable future, there’s great concern that many of them won’t be able to live comfortably throughout retirement, or even meet basic needs.
When retirement savings aren’t adequate enough to fulfill these needs, home equity can step in to fill the void through a reverse mortgage.
What Exactly is a Reverse Mortgage?
If you’ve got equity built up in your home, you can potentially use it to fund many expenses throughout retirement. Basically, a reverse mortgage is a type of loan for older homeowners (aged 62 or older) who borrow against the equity in their homes. It’s a great option for retirees since there’s no need to make monthly mortgage payments to pay it back. Instead, the loan is repaid when you sell your home or after you’ve passed on. At this point, the estate will be obligated to repay the loan with the proceeds of the sale of the home.
The amount of money you’re eligible to borrow depends on a number of factors, including:
- Property value
- Interest rate
Basically, the older you are and the more your property is worth, the more money you’ll be eligible for. You can collect the cash in a lump sum, through a fixed monthly payment, or through a line of credit.
Who is Eligible for a Reverse Mortgage?
To qualify for a reverse mortgage, you’ve either got to outright own your home or have a low outstanding balance on your current mortgage. You also can’t be delinquent on any federal debt, and need to be able to make payments on time for carrying costs (such as property taxes, HOA fees, home insurance, etc).
There are many types of reverse mortgage programs, but the most common is the Home Equity Conversion Mortgage (HECM). These types of reverse mortgages are issued by private banks and are backed by the Federal Housing Administration (FHA).
Not only are there no medical requirements to be eligible for a reverse mortgage, there are also no restrictions on how you choose to spend the money. However, the main drawback to this type of reverse mortgage is that the maximum amount you can obtain from this loan is capped at either the appraised value or the mortgage limit of $625,500, whichever of the two is lower.
How Much Does it Cost to Obtain a Reverse Mortgage?
Just like any other type of loan, there are fees attached to reverse mortgages.
For starters, you’ll have to pay a Mortgage Insurance Premium (MIP), which guarantees that you’ll still get your loan payments even if the loan servicer goes out of business. Usually, this fee is paid up front, and typically costs 0.5% of the appraised value of your home, or 2.5% if more than 60% of your available funds are taken out in the first year. On top of that, you’ll need to contribute 1.25% of your outstanding loan balance every year.
If your home is appraised at less than $125,000, you may be required to pay your lender an origination fee up to $2,500. If your home is appraised at more than $125,000, 2% of the first $200,000 of your property’s value may be charged by your lender, in addition to another 1% of any amount over $200,000. These loan origination fees are limited to $6,000.
Other closing costs that are typical with mortgages will also need to be covered, including property appraisals, title searches, home inspections, credit checks, and taxes.
The beauty of reverse mortgages is that the funds can be used for just about any purpose. Whether you need to make improvements on your home, pay for medical bills, or simply live more comfortably throughout your Golden Years, a reverse mortgage can be a great way to free up some capital and boost your cash flow.