A common method for tapping into home equity is with a line of credit. One way to get a line of credit is with a reverse mortgage. If you are a senior homeowner aged 62+ looking for ways to tap into your home equity, you may be wondering, are reverse mortgages a good deal?
Reverse mortgages are a good deal for some individuals and, like any other financial product, there are pros and cons to be considered before getting the loan. For starters, reverse mortgage fees are higher than conventional mortgage fees because of the upfront Federal Housing Administration (FHA) insurance cost.1 However, all or part of the fees can be financed into the loan.
Another requirement to consider is that you must live in the home as your primary residence, continue to pay property related costs like taxes and homeowners insurance and maintain the home according to FHA standards to meet the loan obligations.2 The loan obligations may be a downside for those planning to move in the near future, but if you are planning to age in place, a reverse mortgage may be a good fit for you.
The benefits of a reverse mortgage may outweigh the downsides if you are looking for long-term financing options in retirement. A reverse mortgage line of credit could be a safety net for unexpected expenses as you age. Another upside is that the line of credit grows over time3 and you can access it on an as-needed basis.
Consider the following scenario:
Margaret is 62 and planning to retire in the next year. She has paid off her home and wants to age in place but is worried that her retirement savings will not be enough for her to maintain her lifestyle as she ages. Margaret contacts a reverse mortgage loan advisor to learn about her options.
After an FHA appraiser determines that Margaret’s home value is $300,000, the loan advisor explains Margaret’s options to her. Margaret decides the best option for her is the line of credit. She will have $107,027 available in the first year and, because of the line of credit growth that is unique to a reverse mortgage, she will have $192,413 after 10 years.4
|Current Home Value||$300,000|
|Available Loan Proceeds||$116,700|
|Net Settlement Costs||$9,673|
|Year 1 Line of Credit Amount||$107,027|
|Year 10 Line of Credit Amount||$192,413|
Margaret can withdraw money from her line of credit whenever she needs it, for any purpose she chooses. The remaining balance will continue to grow for as long as the loan is in good standing.
If you’re interested in learning more about how a reverse mortgage may help you tap into your home equity, fill out the calculator above or call 1.800.976.6211.
1 Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be 2% of the home value not to exceed $13,593. Over the life of the loan, you will be charged an annual MIP that equals .5% of the outstanding mortgage balance.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
3 The reverse mortgage loan balance grows at the same rate as the available line of credit. Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.
4This example is based on a 62-year-old borrower, a variable rate HECM loan with an initial interest rate of 5.380% (which consists of a Libor index rate of 2.880% and a margin of 2.250%). It is based on an appraised value of $300,000, origination charges of $5,000, a mortgage insurance premium of $6,000, other settlement costs of $2,688, and a lender credit $4,000.