Similar to a home equity loan, a reverse mortgage allows you to use the equity in you home as collateral. The difference is that the loan isn’t repaid until the last surviving borrower moves out permanently or dies. Since eligibility factors differ, there isn’t a set minimum amount you can borrow. The size of the loan you can get depends on your age, the appraised value of your home, and the current interest rate.
FHA Reverse Mortgage
A reverse mortgage backed by the Federal Housing Administration is called a Home Equity Conversion Mortgage, or HECM. To qualify for a loan, you must have enough equity in your home and pay off any remaining balance on your existing mortgage, points out Liberty Home Equity Solutions' Reverse Mortgage Guides. In addition, you must satisfy any liens against the home with proceeds from the loan. The lender can distribute the funds as a lump sum, as monthly payments for a fixed number of years or for as long as the homeowners live in the home, as a line of credit, or as a combination of monthly payments and line of credit.
Loan Amount Factors
Although the minimum age requirement is 62, the older you are when you apply for a reverse mortgage, the higher the maximum loan amount you can borrow. The Federal Trade Commission points out that if you wait until you get older, typically you will owe less money on your home, which gives you more equity to borrow. If the home is owned jointly, the calculation uses the age of the youngest homeowner to determine the size of the loan for which you are eligible. You may also qualify for a higher loan amount if your home is worth more. With an HECM, the amount of money you can borrow is based on the lesser of the home’s appraised value, its sales price, or the FHA limit of $625,000.
Equity Line of Credit
If you don’t want to borrow a lot of money, taking out a reverse mortgage as an equity line of credit can save you money in the interest you pay. By receiving funds from a reverse mortgage in the form of a line of credit, you have the option of taking out smaller amounts when you need the money. That way, you are only charged interest on the money you use, points out the American Advisors Group. The balance of the loan increases as you borrow more and additional interest is added to the principal.
Minimum Age Considerations
By taking out a reverse mortgage at the minimum age, you will deplete the equity you have in your home sooner. But since your life expectancy will be longer, you will need money for longer. In addition, with decreasing equity comes increasing debt. Younger seniors who draw out the money in monthly payments receive lower amounts.
- HUD.gov: Frequently Asked Questions About HUD’s Reverse Mortgages
- Reverse Mortgage Guides: How Does a Reverse Mortgage Work?
- American Advisors Group: What Is the Minimum Amount That Can Be Borrowed?
- Federal Trade Commission: Reverse Mortgages
- HUD.GOV. "Home Equity Conversion Mortgages for Seniors." Accessed July 25, 2020.
- Federal Trade Commission. "Reverse Mortgages." Accessed July 25, 2020.
- AARP. "What to Know About Reverse Mortgages." Accessed July 25, 2020.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.