How Much Money Do You Get From a Reverse Mortgage?
If you decide to get a reverse mortgage, the amount of money that goes directly into your pocket or into your bank account can vary greatly depending on which program you choose. The key to all of these choices is something called a “principal limit.” A principal limit is similar to a loan amount and is determined by the age of the applicant and how much his or her property is worth. It’s also important to fully understand how a reverse mortgage works before making any financial decisions.
This principal limit amount is used to qualify a lump sum, a line of credit, a monthly term amount, or a monthly tenure amount. Borrowers can also combine some of these categories, such as a line of credit and a term. In this scenario, the term would provide monthly payments at a fixed amount for a specified period of time or term (10 years for example) along with a stand by line of credit to dip into when you need extra funds. A tenure is a monthly payment plan for the rest of the borrower’s life or as long as she or he lives in the house. A lump sum is one time cash out when the loan goes through. And, again, the principal limit is the figure all these subsequent figures are based on: term, tenure, line of credit and lump sum. Which in turn determines how much money you get from a reverse mortgage.
So the borrower has to decide which route to go and what makes the most sense. Before deciding, the first thing to consider is: Do you have an existing mortgage? If so that loan has to be paid off. You would see how much money is left after paying off the loan and make a decision based on that remaining amount. In some cases, there isn’t much money left over and the main reason to get the reverse mortgage is simply to pay off the forward mortgage and eliminate those expensive monthly mortgage payments. If this is the case, and there isn’t much money left, borrowers typically choose a line of credit. With a line of credit you don’t pay interest on the money you use until you use it AND the line of credit has a “growth rate” of 4-5 percent. That is why the majority of borrowers choose the line of credit option — they’re only paying interest on funds they use and they’re getting a growth rate based on the existing line of credit amount.
If you own property clear and out and don’t have a mortgage you may prefer the term or tenure options. This way you get a fixed amount delivered into your checking account each month and you don’t have to worry about it. It’s like social security. You know what’s coming each month and you’re not paying interest on the money until it comes in every month.
The least desired option is the lump sum. The way HUD has it structured, you receive less money with a lump sum than you do with a line of credit WITH THE SAME PRINCIPAL LIMIT figure. A lot less. It may not seem fair but HUD discourages people from choosing the lump sum because the borrower begins accruing interest on the entire loan amount from the very beginning and they want more equity to remain in the house.
Many people worry about how long they have to pay off a reverse mortgage after death or even wonder how to pay back reverse mortgages in general. These are topics we cover extensively in other articles.
Whatever you choose, you should talk it over with an expert here. Just click over to our reverse mortgage calculator to see how much money you can get from a reverse mortgage for your home. With so many different variables it’s vital to understand everything including all of the types of reverse mortgages, as well as all of the downsides of a reverse mortgage before you make a decision.