Older adults approaching retirement — or are already retired — may find that much of their net worth isn’t in the bank but in their home.
One way to tap that money is to borrow against your home’s equity through a reverse mortgage, especially if you own your home outright or have paid down most of your mortgage debt. If you are 62 or older, you can use a reverse mortgage to supplement your income, pay for home repairs or even purchase another property.
But exactly how much equity do you need in order to qualify for a reverse mortgage? In this article, we’ll talk about how much equity you need to be eligible for this type of loan as well as alternatives to make the most of the investment you’ve already made in your home.
How much equity do you need to get a reverse mortgage?
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration (FHA). You may also find single-purpose reverse mortgages through your state or local government or nonprofits to be used for specific projects, and some private lenders offer proprietary reverse mortgages to those with higher home values.
For all of these, there is no firm equity requirement for a reverse mortgage. HECM eligibility standards state that borrowers must own the property they are leveraging outright or have paid down a “considerable amount.” Each lender will have a slightly different approval process based on your specific financial situation and a number of other factors, including your age, loan type, your home’s value and current interest rates.
The rule of thumb. In general, though, you should expect to have 50% equity or more in your home to get a reverse mortgage, especially through HECM. This is because you must use your HECM to pay off your existing home loan first. If you own less than 50%, the proceeds of your reverse mortgage won’t cover that gap.
The more equity you have in your property and the less you owe on your current mortgage, the more money you’ll receive to use for other purposes. Let’s look at a few examples.
Example 1. Jane is 72 years old and lives in a single-family home valued at $200,000. She owns her home outright, which means she has 100% equity and no existing mortgage or line of credit against her property. According to LendingTree’s reverse mortgage calculator, she’d be eligible for a lump sum of $110,254 — just over 55% of her home’s value.
Example 2. What if you don’t own your home outright? Joe is also 72 and lives in a single-family home valued at $200,000, but he still has a $90,000 mortgage. In this case, he has 55% equity built up in his home and, according to the calculator, would be eligible for a lump sum of $20,254.
Example 3. But what if Joe owes $150,000 on his mortgage? He has just 25% equity in his home and, according to the calculator, would not qualify for a reverse mortgage.
What you’re eligible for will vary depending on your circumstances. If you’re younger and the sole title holder, for example, you’ll need more equity to qualify. In Example 2 —a $90,000 mortgage on a $200,000 home — a 62-year-old borrower would only receive a lump sum of $7,256. If the same borrower had just 50% equity or a $100,000 mortgage, he or she wouldn’t even qualify for the program.
Reverse mortgage calculators provide estimates, so it’s best to speak with an expert about your specific situation. If you are interested in a reverse mortgage, particularly through HECM, you must meet with an HUD-approved counselor to discuss the process.
How much does a reverse mortgage cost?
With a reverse mortgage, borrowers don’t make monthly payments, unlike with a traditional home loan. Lenders collect when the homeowner moves, sells or dies. But like a traditional mortgage, a reverse mortgage can be complex and costly — you’ll have to pay closing costs, origination and servicing fees, and insurance premiums on top of ongoing home expenses like repairs and taxes. Borrowers should look closely at their financial obligations and their lifestyle before they apply, according to Terri Boam, a HECM counselor at the AAA Fair Credit Foundation.
“[HECM is] an expensive product, so it needs to be something that’s not used for a luxury item,” she said. “It needs to be a financial necessity, in my opinion. It’s a great product for those who need to supplement their existing income or [who are] looking at getting out from underneath paying their mortgage so they can use those extra funds to supplement their lifestyle.”
Other requirements for getting a reverse mortgage
While the equity requirements for reverse mortgages aren’t set in stone, there are a number of other specific standards borrowers must meet for the HECM:
- You must be at least 62 years old.
- The property must be your primary home.
- You cannot have outstanding federal debt.
- You must be able to afford to pay property taxes, insurance and homeowners association fees.
In addition, your property must be a single-family home, a two- to four-unit home that you occupy, a HUD-approved condo or an FHA-approved manufactured home.
If you’ve considered a reverse mortgage in the past but haven’t actually applied, it’s important to know that the U.S. Department of Housing and Urban Development, under which the FHA falls, implemented several changes to HECM loan limits and mortgage insurance premiums (MIPs) in August 2017. These new rules, which took effect for loans issued in October 2017, impact borrowers in two key ways.
- Limits on how much you may borrow. The new rules decreased the principal limit factors for all HECMs, which means that borrowers will generally receive a smaller percentage of their home’s value in their reverse mortgage than in previous years. Where HUD previously loaned nearly 60%, participants can now expect closer to 50% — though this will vary depending on the applicant’s age and the current interest rate.
- Higher upfront mortgage insurance premium (MIP). The second change is an increase in the MIP that all borrowers were required to pay upfront from 0.5% or 2.5% to a flat 2%. This is somewhat offset by a decrease in annual mortgage insurance premiums, a drop from 1.25% to 0.5%.
These changes are intended to help bring the Mutual Mortgage Insurance Fund that supports FHA’s mortgage programs back to sound financial footing, said Adolfo Marzol, a senior adviser to HUD Secretary Ben Carson.
“[HECM is] meant to help seniors age in place,” Marzol said. “It’s meant to help that senior that’s house rich but maybe cash poor benefit from the value they’ve built up in their home over the years, but we can’t have it be a drain.”
If you already had a reverse mortgage through HECM prior to these changes, your loan terms won’t be affected, Marzol added.
What if I don’t have enough equity for a reverse mortgage?
If you don’t qualify for a reverse mortgage, you still have options for accessing your home equity. Before making any decisions, consider whether any of these alternatives fit your short- and long-term personal and financial needs.
Downsize or move to an apartment
If your home is too big or too costly to maintain, you can sell it and move to a smaller, less expensive house or apartment. With this strategy, you’ll have less space for upkeep, and you can use the proceeds from the sale to purchase your new place or pay rent and still have cash left. Another advantage of an apartment complex: on-site amenities, especially those designed for older residents.
Tap your retirement savings
If you are considering a reverse mortgage for a cash boost or income supplement and are old enough to access your retirement accounts without withdrawal penalties, these savings provide a less costly way to meet your needs.
Apply for a home equity loan or line of credit
If you need a quick cash infusion for an emergency or want to know you have credit to draw against when you need it, a home equity loan or home equity line of credit (HELOC) may be a better option for accessing your equity. Keep in mind that unlike a reverse mortgage, which you’ll never have to pay back as long as you’re living in the home, home equity loans and HELOCs do come with scheduled payments, and you risk losing your property altogether if you default.
Do a cash-out refinance
A cash-out refi is another short-term solution for quick access to your equity — however, it does come with similar closing costs to a reverse mortgage and isn’t a cheap solution. Cash-out may be beneficial if you can get a lower rate or better terms on your mortgage.
The bottom line
Even if you qualify for a reverse mortgage, it may not be the only — or best — choice for you. If you aren’t planning to stay in your home for long, or if you have health issues that may require a move or if you hope to live closer to your kids, look into less expensive ways of accessing your hard-earned home equity.
“The primary goal for most [homeowners] is that they are trying to pay off their current existing mortgage,” Boam said. “In most cases, they are downsizing or moving to be closer to family.”
