Reverse Mortgage Proceeds: What’s Best?
What do you want to know about reverse mortgage proceeds?
- How much money can I receive from a reverse mortgage?
- Is there a loan limit?
- What is the 60 percent rule?
- What are my payment options?
- Are reverse mortgage proceeds tax free?
- How can reverse mortgage proceeds be used?
Amount of Proceeds
How much money can I receive from a reverse mortgage?
The amount you are able to receive varies and is based on many factors including:
- Your age
- Appraised home value
- Current interest rates
In general, you may receive more money from your reverse mortgage when your house is more valuable and the older you are.
Is there a lending limit?
Yes. With government reverse mortgage programs, the FHA lending limit is currently $625,500.
60 percent rule
What is the 60 percent rule?
For the first year of your loan, you may not access more than 60 percent of the available loan proceeds. In month thirteen, you may access all of the funds without restriction.
Use of proceeds
How can reverse mortgage proceeds be used?
Reverse mortgages can help homeowners achieve a variety of goals. They can top up depleted retirement accounts, fund new businesses, enrich lifestyles, deliver economic safety, avert foreclosure, or even purchase new homes. In fact, your proceeds may be used for anything, although many use them to pay for health care and living expenses.
Are reverse mortgage proceeds tax free?
The proceeds from your reverse mortgage are considered loan advances, not income, and are not taxable.
What are my payment options?
What are my payment options?
?You may take your reverse mortgage proceeds in several ways:
- Lump sum
- Monthly payments for a specified period (term)
- Monthly payments for life (tenure)
- Line of credit
- Combination (for example, a line of credit plus monthly payments)
Lump-sum distributions work best for preventing foreclosure, boosting retirement funds,downsizing to a new home and paying off existing medical bills or other one-time needs. Lump sum distribution is the only way to take proceeds that allows you to choose a fixed-rate reverse mortgage. Here's how it works.
If you have a lot of home equity, but not enough income to pay your current mortgage, you might use some of that equity to pay it off, allowing you to keep your home and have no mortgage payments. You might get some extra cash as well.
- Retirement savings
According to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College, just eight percent of households approaching retirement have enough savings to generate sufficient income to maintain their standard of living after they stop working. If you can earn more with investments than the interest rate you’d pay on a reverse mortgage, borrowing and investing might be a good strategy.
- Buy investment property or a second home
There are no restrictions on how you use the proceeds of your reverse mortgage. Because you don't need good credit or a large income to qualify, it's easier to purchase rental property with a reverse mortgage than with an investment property loan. Just make sure that the property is a good enough investment to make it worth the loan fees and interest. Reverse mortgage proceeds may also be used to buy a second home (to escape harsh winters, perhaps). As long as the home with the reverse mortgage remains your primary residence, repayment is not required.
- Buying a new home
Reverse mortgages can also be used to downsize to a new home. Here's how that works. The Jones' sell their family home and get $300,000 in cash. They have an additional $100,000 in savings, and they want to buy a condo for $200,000. They could pay cash, which would leave them with $200,000 cash (according to New York Life, that would generate a monthly income of $1,017), or they can buy their home with $75,000 down and a reverse mortgage, leaving them with $325,000. They'd have no mortgage payment and the $325,000 could be expected to generate $1,652 a month.
Reverse mortgage lump sum payments can affect your eligibility for need-based government programs, including Medicaid. Generally, reverse mortgage proceeds don't count as assets if spent in the same month they're received. If you don't spend it all, however, it could push your asset totals beyond the allowable limits for Medicaid or SSI eligibility.
Monthly payments, on the other hand, can enhance your lifestyle without making you ineligible for most kinds of aid. Another advantage of monthly payments, if you don't need all of the proceeds at once, is that you only pay interest on the amounts disbursed.
Monthly payments can be taken in several ways:
- Term (monthly payments for a specific period) – if you expect to move in five years, for example, you can choose a five-year term. Others opt to take reverse mortgage proceeds for a few years and put off receiving Social Security (which increases their benefit).
- Tenure (monthly payments for as long as you live in your home)—this option provides lower payments, but you're guaranteed these payments even if your loan balance exceeds your home's value.
- Modified tenure or modified term (combine a line of credit with smaller monthly payments).
Line of Credit
A reverse mortgage structured as a line of credit can be used on its own or added to any other payout option — for example, you could take smaller monthly payments and have the line available in case of emergency. A credit line can also be used to start a new business if you get tired of retirement, to fund college tuition for a relative, or for an annual vacation. The beauty of the line of credit is that you only pay for what you use, and it can even grow over time as your property appreciates.
The way you choose to take your money depends on your needs and financial situation. HUD-approved reverse mortgage counseling (required if you pick a government reverse mortgage but probably a good idea for everyone) can help you sort them out and select your best option.