Curious how much you can get through a reverse mortgage by borrowing against your home equity? This is probably one of the most common questions seniors
have about getting a HECM or reverse mortgage in Colorado.
As you probably know, a Home Equity Conversion Mortgage (HECM) reverse mortgage works very differently than a standard mortgage. Rather than borrowing
money to buy a house, you’re releasing the equity you’ve already built up in your home*. Unlike a traditional mortgage, the balance on a reverse mortgage
also increases over time, which is one factor that limits how much you can borrow.
In general, the amount you can get will be larger the older you are, the more your home is worth, and the lower the interest rate on the loan. There
are a few other things you should know, too. Here’s a general overview that explains how much you can get, but remember you will need to work with
a reverse mortgage specialist for an accurate estimate of your maximum loan amount.
So How Much Can You Get with a Reverse Mortgage?
The amount of money you can access with a HECM loan depends on:
- Your age. You will need to be at least 62 to qualify. Generally speaking, the older you are when you take out the loan, the more money you can access.
As a general idea with a 5% interest rate, a 65-year-old may be able to 52% of the home’s equity whereas a 71-year-old may be able to borrow up
to approximately 60% of the equity.
- Your home’s value. The current appraised market value of your home will also determine maximum loan proceeds. The more equity you have, the greater
the potential loan amount.
- The interest rate. The lower the interest rate you get, the more money you can access. There is a floor on the rate used to calculate the amount available,
so anything below that rate is calculated at the floor rate.
- Existing mortgages and/or liens . Any existing mortgage balance or other liens against the property must be paid off from the loan proceeds first before
you access any money. Of course by paying off these loans, you will eliminate the monthly payment saving yourself money every month.
- Type of distribution. How you choose to receive the loan will impact your ultimate loan amount. The lump sum option is typically the least preferred
method of taking the funds while a line of credit offers the most money available to you over the long run due to the growth rate available with
Cap on Withdrawals During the First Year
Since 2013, HECMs have a limit on the amount you can take out during the first 12 months of your loan. First, the Department of Housing and Urban Development
(HUD) determines how much you can borrow overall. As discussed earlier, this number, called your initial principal limit, is based on your age, home
value, and interest rate. You can usually take out up to 60% of the initial principal limit during the first 12 months.
If you have an existing home loan or other necessary payments that exceed 60% of the limit, you are allowed to take out enough to pay off these debts
(including any upfront fees) plus cash up to 10% of your initial principal limit. The rest of the money that you qualify for will be available 12 months
after the loan closes.Limits on Reverse Mortgage Loans
How Do You Want to Receive the Money?
Another important factor to consider is how you want to receive the loan proceeds. If you choose a monthly payout or adjustable-rate line of credit, you
can access the remaining funds (beyond the 60% limit) after the first 12 months. If you choose a fixed-rate, lump sum loan, you can only access the
amount allowed under the first-year limits and any remaining loan amount will be forfeited!
How Much Equity Do You Have?
You can still qualify for a reverse mortgage even if you have an existing home loan. Fortunately, getting a reverse mortgage in Colorado is easier than
it was a few years ago thanks to rebounding home prices. If you have at least 50% or more equity in your home, are over age 62 and have adequate income,
you should qualify for a reverse mortgage. The lower your existing mortgage balance, the more proceeds you can access from the loan.
A reverse mortgage specialist can give you a personalized estimate of how much you can get from a reverse mortgage. Give me a call to find out how much you can receive from a reverse mortgage and learn more about how these factors will affect you.
*Reverse mortgages are also available to purchase a home, but this is a topic for a different article.