Dads concerned about their finances in the coming years and who are joining the senior citizen population, as well younger dads who are concerned about the financial futures of their parents may consider many strategies. A huge asset and source of financial security is in their homes, and an important and popular strategy is the use of reverse mortgages to tap into the equity in the homes of senior citizens.
According to the National Reverse Mortgage Lenders Association, homeowners aged 62 and older held $7.82 trillion in home equity in the second quarter of 2020, and that total rises every quarter. Home equity is usable wealth if you sell and downsize or borrow against that equity. That’s where reverse mortgages come into play, especially for retirees with limited incomes and few other assets.
The American Association of Retired Persons (AARP) devotes a lot of energy toward educating its base in financial strategies and has stated that “you can use your home as a piggy bank in several ways to address those future financial concerns, and the keys is Home equity.”
What Is Home Equity?
Investopedia defines Home Equity as the value of a homeowner’s interest in their home. It measures the real property’s current market value (less any liens – including mortgages that are attached to that property). The amount of equity in a house – or its value — fluctuates over time as more payments are made on the mortgage or market forces affect the current value of the property. That difference between your mortgage balance and the home’s value is an asset that you can borrow money against as well as live in.
So what are ways to tap into that asset? Some prime examples are:
- Home Equity Loans – typically available for around 85% of the equity in your home.
- Cash Out Refinance — a new mortgage that’s bigger than your current balance, and typically 80% of your home’s total value, less whatever you still owe on your mortgage.
- Home Equity Line of Credit — typically around 75% to 85% of the value of your home, minus your mortgage balance.
- Reverse Mortgage — lets you convert a portion of the equity in your home into cash, is generally 40-60% of your homes’ appraised value, but without a monthly repayment as with a traditional loan. Traditionally, the loan is repaid when the last surviving borrower sells their home.
Reverse Mortgage Strategy
To many homeowners 62 and older, or their concerned families, this makes reverse mortgages a strategy to consider strongly. Reverse mortgages are best used as part of an overall retirement plan, and not when there is a pending crisis.
According to The National Council on Aging (NCOA) younger Boomers are increasingly likely to take out a reverse mortgage. When Home Equity Conversion Mortgage (HECMs) were first offered by the Department of Housing and Urban Development (HUD), a large proportion of borrowers were older women looking to supplement their modest incomes. But that has changed. During the housing boom, many older couples took out reverse mortgages to have a fund for emergencies and extra cash to enjoy life.
In today’s economic recession, younger borrowers (often Baby Boomers) are turning to these loans to manage their existing mortgage or to help pay down debt. Reverse mortgages are unique because the age of the youngest borrower determines how much you can borrow. It is important to note that borrowers deplete their home equity as their loan balance grows over time.
What is a Reverse Mortgage?
NCOA says that a reverse mortgage or HECM, is a unique type of loan for homeowners aged 62 and older that lets you convert a portion of the equity in your home into cash.
But unlike a traditional home equity loan or second mortgage, you don’t have to repay the loan until either you no longer live in the home as your principal residence or you fail to meet the obligations of the mortgage. Available funds can be distributed as a single lump sum, line of credit, structured monthly payments, or combination of all.
But before you consider taking an HECM, note that HUD requires that homeowner(s) interested in pursuing an HECM receive mandatory reverse mortgage counseling regarding the implications of and alternatives to a reverse mortgage from a HUD- approved HECM counseling agency.
After contacting a reputable reverse mortgage counselor you will want to determine how much money you can get from a reverse mortgage to determine whether it is right for you.
How much money can you get?
How much can you get from a reverse mortgage depends on several factors. The responsible due diligence necessary to get all the parameters and information is for you to consult a pro and utilize a reverse mortgage calculator.
Reverse mortgage funs parameters
- The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current interest rates, and your home value.
- The amount of money you may borrow is generally 40-60% of your homes’ appraised value.
- If your home value is $822,375 or less, the federally insured HECM will likely meet your needs.
- If your home value exceeds the national 2021 lending limit of $822,375, you will generally receive a larger benefit/payout on a jumbo reverse mortgage.
- Try ARLO™ reverse mortgage calculator to estimate your available loan amount here: https://reverse.mortgage/calculator