Thursday, May 10, 2018

How Much Equity Do You Need for a Reverse Mortgage?

How Much Equity Do You Need for a Reverse Mortgage?
A reverse mortgage can be a useful way of accessing the equity in your home, but that raises an important question: how much equity do you need for a reverse mortgage?

Reverse mortgages make the most sense for people who have been in their homes for a long time and have paid down a substantial amount of their mortgage debt, or even own the home outright. Beyond that, along with the issue of how much equity you need, there are other key questions that go into determining whether a reverse mortgage is a good fit for you.

How Much Equity Do You Need for a Reverse Mortgage?

Different lenders have different standards, and there are a variety of specific factors that go into determining how much equity you need for a reverse mortgage. A reverse mortgage lender can walk you through all the issues as they apply to your situation, but a good rule of thumb is that you should not even be considering this option unless you own at least 50 percent of the value of your home.

The reasoning behind this rule of thumb is that a basic qualifying requirement for reverse mortgages is that you should be able to pay off any existing mortgage with the new loan proceeds. This would imply that you would have to have at least 50 percent equity, though with fees it might require a bit more.

Though crucially this equity determination is based on the current value of your home, not what you originally paid for it. This can work in your favor if your home has appreciated in value, but in any case, you will need to have the property reassessed to determine just how much equity you have.

Other Key Questions

Beyond how much equity you have in the home, there are other key questions that determine whether you can or should get a reverse mortgage:

1. How old are you? This is an easy one because it is cut and dried. You have to be at least age 62 to qualify for a reverse mortgage, and generally speaking the older you are, the greater percentage of your equity you can borrow. However, for planning purposes, there is no reason you can't start looking into a reverse mortgage while you are still approaching age 62.

2. What other debts do you have? The loan is guaranteed by the equity in your home, so the lender wants to make sure you have the financial means to maintain that home and keep up with home ownership requirements such as property taxes and insurance. Lenders are going to shy away if you have other debts which may crowd out those home-related expenses.

3. What income do you have coming in? This is related to the above issue of being able to keep up with the expenses of preserving the home's value.

4. What is your credit history? Even though there is equity to provide some security for the loan, a reverse mortgage represents a long-term financial obligation. Lenders are going to be wary of potential borrowers whose shaky credit histories suggest they may not be able to meet that kind of obligation.

5. Are there better ways to access your equity? A reverse mortgage is one way to access equity in your home, but a traditional home equity loan might be cheaper. The nature of a reverse mortgage is that it is ideally suited for people who don't plan on being able to pay off the loan before they die or sell the home. However, if you view the need to borrow money as more temporary than that and can make the necessary loan payments out of your net income, a home equity loan might be a more cost-effective alternative.

The equity in your home may be a key component of your net worth – for many people, it is the single greatest component of that wealth. This makes it a valuable resource which can be used if needed, but which should be used carefully.