But before applying for a reverse mortgage, you will want to get an idea of how much you will be able to receive.
The amount of money you can receive from a reverse mortgage is impacted by several factors and variables, which we detail below.
Ultimately, to get the most accurate idea of how much you can get from a reverse mortgage, we recommend talking to one of our reverse mortgage specialists who will be able to answer all of your questions.
What is a Reverse Mortgage and How Does it Work?
The home equity conversion mortgage (HECM), commonly referred to as a HECM reverse mortgage or HECM loan, is the most prevalent type of reverse mortgage. Other options include single-use reverse mortgages and proprietary reverse mortgages, such as the jumbo reverse mortgage, tailored to those with specific needs.
Reserved exclusively for homeowners aged 62 or older, reverse mortgages hinge on the accumulation of substantial equity in the homeowner’s primary residence. It’s important to note that investment properties and vacation homes don’t meet the eligibility criteria for a reverse mortgage.
A reverse mortgage can serve as a financial lifeline, enabling senior homeowners to tap into the equity of their homes without shouldering monthly payments, unlike a home equity loan or a home equity line of credit (HELOC).
Upon obtaining a reverse mortgage, the first step will be to settle any outstanding traditional mortgage. Once that’s taken care of, homeowners have a range of choices regarding the remaining reverse mortgage proceeds. They can opt for a lump sum payment, monthly installments, a line of credit, or a combination of those options.
Although a reverse mortgage can offer financial flexibility to older homeowners, it’s crucial to remember that certain responsibilities still rest on the borrower’s shoulders. These include paying property taxes, maintaining homeowners insurance coverage, and ensuring the home’s overall upkeep.
Notably, the security of a reverse mortgage stems from its backing by the federal government. The U.S. Department of Housing and Urban Development (HUD) effectively regulates reverse mortgages, which is further insured by the Federal Housing Administration (FHA). Such measures aim to safeguard both borrowers and lenders.
How Much Can I Get From a Reverse Mortgage?
The amount of money reverse mortgage borrowers can receive from a reverse mortgage loan is based on a variety of factors. But the most important formula to understand is what is known as the principal limit, so that is where we will start.
This principal limit is derived from taking into account several key factors: the age of the youngest borrower, the expected interest rate, and the maximum claim amount.
Through this calculation, lenders assess the potential borrowing power of individuals considering a reverse mortgage.
We will go into each of these factors plus others that can affect how much you will be able to receive from a reverse mortgage.
Age of the Youngest Borrower
The age of the borrowers is considered one of the most important factors that affects how much borrowers are able to receive.
To meet the eligibility criteria for a reverse mortgage, borrowers must reach the age of at least 62. However, when multiple individuals own the property, the borrowing capacity is contingent upon the age of the youngest homeowner.
As a general rule, the older the borrower, the larger amount they will be able to receive.
FHA Lending Limit
Every year, the FHA determines the lending limit for HECM reverse mortgages. This is the maximum amount that homeowners are able to borrow from a reverse mortgage.
The current lending limit for 2023 is $1,089,300.
The principal limit is calculated with the lending limit as the baseline.
For homeowners who have properties that are worth more than the FHA lending limit, several lenders do offer jumbo loans, which are propriety reverse mortgages that present an enticing option for borrowers seeking higher lending limits.
These jumbo reverse mortgages have the potential to reach substantial amounts, soaring as high as $4 million. It’s important to note that jumbo reverse mortgages are solely supported by the lender, as they do not enjoy the backing of the FHA insurance found in other mortgage options.
The Home’s Value
With that in mind, one of the factors that will be considered is the current market value of the home.
During the reverse mortgage application process, the lender will order an appraisal of your property. The appraised value of your home will be used to determine how much equity the home has accumulated, which is important for finalizing the total loan amount.
The equity is determined by making a simple calculation: take the current market value and subtract any money that is owed on the home. This may include the traditional mortgage or any other loans that may have been obtained such as a home equity loan or home equity line of credit (HELOC).
The less money you owe on any such loans, the more equity that can be used for the reverse mortgage loan.
There is not an exact amount or percentage of equity you need to obtain a reverse mortgage, but there will need to be enough money to pay off the current mortgage, if there is one, and the costs and fees that come with a reverse mortgage.
Homeowners exploring reverse mortgages will have a range of options for how the funds are disbursed. This includes the option to receive their money through various avenues: a lump sum payment, fixed monthly payments, a line of credit, or a tailored combination of these options.
The method chosen for receiving the funds can also influence the overall amount that one may receive. This element of flexibility allows homeowners to customize their reverse mortgage experience in a manner that best aligns with their unique financial goals and needs.
- Lump Sum. The single disbursement lump sum payout is the only option that comes with a fixed interest rate. The being said, the lump sum option does come with a handful of limitations you will want to consider.
- Monthly Payments. Borrowers have the choice between a tenure payment plan or term payment plan. Under the tenure plan, you will be able to receive payments for the rest of your life. The lender calculates the payments assuming you will live to 100 years old.
- Line of Credit. Receiving funds as a line of credit may have the potential to give borrowers both the most flexibility and possibly the most amount of money. A line of credit allows homeowners to use the funds as needed. One of the advantages of a line of credit is that the untouched balance actually grows.
Interest rates play a role in how much equity homeowners have access to: As reverse mortgage interest rates go up, it lowers the total principal amount available to be disbursed to borrowers. As interest rates go down, it means there is more principal available to be disbursed to the homeowner.
The interest charged is paid back with the loan balance when the homeowners sell the home, no longer live in the home full time, or when the last remaining borrower passes away.
Closing Costs and Other Fees
When a reverse mortgage loan closes, borrowers do need to pay some closing costs that will also affect the total amount that homeowners receive.
Alternatively, borrowers may also choose to pay for these costs out of pocket, which means that they will not impact the total loan amount.
Use a Reverse Mortgage Calculator
If you want to get an estimate of actual numbers you may qualify to obtain with a reverse mortgage loan, check out our reverse mortgage calculator.
Talk to a Reverse Mortgage Specialist
The best way to get the most accurate and realistic idea of what you might be able to obtain from a reverse mortgage loan is to talk to one of our experienced reverse mortgage specialists.
A reverse mortgage can be a valuable financial tool for retirees to enhance their financial situation and meet various needs during their retirement years. By leveraging the equity in their homes, senior homeowners can access funds without having to make monthly mortgage payments.
The amount of money available through a reverse mortgage is influenced by several factors such as the age of the borrower, the home’s value, the lending limits set by the FHA, and the chosen distribution type.
Ultimately, it is essential to consult with a reverse mortgage specialist to obtain accurate information tailored to your specific circumstances. These specialists can provide guidance, answer your questions, and help you make informed decisions about your retirement planning.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.