A home is usually the most expensive purchase that the average American consumer makes. The hope, generally, is that the upfront cost of the house will create dividends in terms of equity as the value of the home increases over the years. And if you stay in a home for decades, making regular monthly mortgage payments, it’s an investment that probably pays off.
But who, exactly, benefits the most from that investment? The equity you build up counts as an asset, adding to your overall bottom line. But having $100,000 in home equity doesn’t provide the same liquidity as an equal amount in a savings account, for example. That home equity money only becomes available when you—or your heirs—sell the property.
There is, however, a way to access home equity both before you die and without selling your house. It’s called a reverse mortgage, which is basically a home loan that converts home equity into cash.
Let’s take a look at how a reverse mortgage works and answer some commonly asked questions.
- Should You Get a Home Equity Loan or a Reverse Mortgage? With a traditional home equity loan, or second mortgage, you make monthly payments for the duration of the note. With a reverse mortgage, the loan doesn’t need to be repaid until the last borrower sells the home, moves out, or passes away. So a reverse mortgage lets you tap funds without putting additional stress on your monthly budget.
- Is Your Home Eligible for Reverse Mortgage? Homes must be your primary residence and not exceed four units. Condominiums must be in projects approved by the U. S. Department of Housing and Urban Development.
- How Much Money Can You Get From Your Home? That is determined by three things: 1) current interest rates, 2) the age of the youngest borrower in the house, 3) either the appraised value of the house, the sales price, or the mortgage limit of $625,500, whichever is smaller. As an example, a 68-year-old person living in a $300,000 house could be eligible for around $170,000 from a reverse mortgage.
- How Do You Receive Payments? You have options. You can take equal monthly payments for as long as you live in the house or for a fixed amount of time. You can establish a line of credit, or do a combination of scheduled monthly payments and a line of credit, either for as long as you live in the house or for a fixed amount of time. You can also take a lump sum.
- Will You Have an Estate for Your Heirs? Yes! Proceeds from the sale of the house will have to cover cash, interest, and any applicable finance charges. Everything else can go to your heirs. Also, Federal insurance protects you and your estate if the amount needed to pay off the loan exceeds the home value.