Reverse mortgages aren't commonly talked about, so it is easy to have heard about reverse mortgages without understanding how a reverse mortgage works. The best way to understand how reverse mortgages work is to examine a reverse mortgage example. Before looking at an example, you should understand a bit about the requirements and what can affect how much money you can borrow from a reverse mortgage.
Reverse Mortgage Basics
Reverse mortgages allow you to continue to live in your home while taking the equity out of your home without making any payments to the lender. In most cases, you can either take out a lump sum or the lender will make payments to you each month. As long as you live in the home as your primary residence and you meet all other requirements of the loan, you won't have to begin paying the bank back. In order to be eligible for a reverse mortgage, the borrower must be at least 62 years old, own their primary residence and have significant equity in their home.
Things That Affect Reverse Mortgage Payouts
Reverse mortgages, like most financial products, are affected by current interest rates which you cannot control. If interest rates are lower, reverse mortgage payouts tend to be higher. If interest rates are higher, reverse mortgage payouts usually decrease. Age is another major factor in reverse mortgage payouts. In general, the older you are, the more equity you can access in your home. Finally, the amount of equity you have available in your home will affect your payout. If you owe nothing, you should have access to the most equity possible.
A Reverse Mortgage Example
Here is an example of how a reverse mortgage works. Eric is a 75 year old male. He is the sole owner and resident of a house that has recently appraised for $300,000 in Vienna, Virginia. He owns the home outright, which means he does not currently have a mortgage or line of credit of any kind. Based on these facts, Eric can get a lump sum payment from a reverse mortgage of $165,399 according to a reverse mortgage calculator. Alternatively, if Eric would like to have monthly payments made to him from the reverse mortgage, his payments would be $1,083.97 per month. It should be noted the quoted figures are based on estimated interest rates for the week of February 1, 2016.
Reverse mortgages don't make you choose between only receiving a lump sum up front or only receiving monthly payments. You can take a smaller lump sum and reduced monthly payments, if you wish. For instance, using the same example above, Eric may want to access $20,000 immediately so he can buy a new car. He would prefer to access the rest of his equity in monthly payments. In this case, he would get the $20,000 up front and monthly payments of $960.29.
Eric doesn't get the full $300,000 of his home equity in a reverse mortgage due to fees and other costs, as well as the interest the bank will earn over time on the loan. According to the calculator, his lump sum payment or future monthly payments have already been reduced by fees and other costs, which would amount to $8,908. These costs normally include mortgage origination fees, mortgage insurance and other closing costs. The rest of the difference between the amount paid out and the equity in Eric's home is an allowance for interest to accrue on the loan.
As you can see, there are many options when it comes to taking money out of your home with a reverse mortgage. In order to get the best deal possible on a reverse mortgage, you should make sure to get quotes from multiple reverse mortgage companies and choose the best option for your situation.