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Do Reverse Mortgages work for expensive homes?

A reverse mortgage is also known as a home equity conversion mortgage (HECM). As the name suggests, it’s a mortgage where a mortgage lender gives you the money, and you don’t have to pay it back until after your demise when the house is sold to repay the debt.

To benefit from this arrangement, you must be 62 years old or above. If you’re somewhat younger, you may still get a reverse mortgage but without the insurance offered by the government.

So how does a reverse mortgage work? Here’s how.

How the Reverse Mortgage Works

A reverse mortgage is a provision for seniors who have no income to get some money by tapping into home equity. Unlike mortgage refinancing and home equity lines of credit, your credit score is not a considerable factor.

If you qualify for a reverse loan, your lender gives you the money as a loan, but you’re not required to make the monthly payments. Instead, the house will be sold after you die, and the money from the home sale will be used to repay your reverse mortgage.

In case some cash is left after repaying the full mortgage, your heir will get this sum. Alternatively, you may decide to sell the house yourself and use the sales proceed to repay the reverse mortgage.

Your children can also choose to do the same. They can repay the reverse mortgage and keep the house. But as long as you’re still in the house, you’re the house owner. However, your debt will gradually increase due to the accumulation of interest.

That said, your house keeps appreciating with time, and home equity may similarly increase. This means your debt is not likely to overtake your house value.

What Are the Requirements for A Reverse Mortgage?

Other than the age requirement, you must fulfil the following conditions in order to get a reverse mortgage.

  • Your home must be a primary residence. This means you must be living in the house. A second home or an investment property would not qualify.

  • You must have full ownership of the house or have a small mortgage balance remaining. The money you get from reverse mortgage should be able to clear your existing mortgage upon closing.

  • You should not have any federal loans such as federal taxes or student loans. If you do, you have to clear it first, and you’re allowed to use money from the reverse mortgage to clear these debts.

  • You must agree to use part of the reverse mortgage money or use your own money to continue paying for taxes, insurance, and property maintenance.

  • Your house must be in good condition. Otherwise, you may be asked by your lender to repair the house before getting a reverse mortgage.

  • You must receive counselling from an approved counsellor. This is to discuss your eligibility, implications of taking the loan, and available alternatives.

Do Reverse Mortgages Work for Expensive Homes

Frankly, the value of your house doesn’t matter in reverse mortgages. This means your house can qualify for a reverse mortgage, however expensive it is. But expensive homes do not mean that you’ll get more money from the reverse mortgage. This is because there’s a limit to how much you can get.

In 2021, the limit is set at $822,375. This means if your house is worth $ 1 million, or even $ 5 million, you can’t get a loan exceeding $ 822,375. So you can’t take advantage of the excess home equity you might have.

However, you still have some advantages over someone with low home equity and less home value. First of all, you can obtain the maximum loan limit without much difficulty. Secondly, you can decide to sell your house, pay off the debt, and still have more cash left.

In case of death, your house will be sold, clear off the debt, and your heirs will get the balance in cash.

Should You Get a Reverse Mortgage

Your circumstances may differ from other peoples’, and what works for one person may not work for you. Before making a decision, consider the pros and the alternatives. Listen to your counsellor’s advice. If you have no income and your children have their own houses or don’t have any children, then a reverse mortgage may work fine for you.

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