If you are of the qualifying age of 62 and have enough equity in your home to consider refinancing, you likely are wondering what your reverse mortgage payout options are. We’ve got some helpful answers.
The reverse mortgage payout options can vary depending upon your specific situation. Of course, the surest method of determining what you will be able to cash out from your equity situation is by using a reverse mortgage calculator. But we’ll also go into some detail here, so you can know what to expect if you plan on tapping into some of that hard earned equity in your home.
What Can You Get?
Your reverse mortgage payout options will vary depending upon several different factors, Namely, they include the interest rate, which is determined by the London Interbank Offered Rate (LIBOR). They can also be calculated using a one-year treasury, in some cases; but your lender may offer you a choice between the LIBOR rate and the treasury rate, so be sure to ask (they can vary and affect your reverse mortgage payout options). Some lenders may only offer one, so it’s important that you also shop around to get a real scope of your options.
Most Reverse Mortgages Are Backed by the FHA
A vast majority of reverse mortgage notes are backed by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Authority (FHA) and their Home Equity Conversion Mortgage program. The FHA usually limits loans they will back to a $300,000 cap, but this can vary based upon the region in which you reside. The newer American Recovery and Reinvestment Act has effectively increased this limit to $625,500, but it can differ by region. Some banks offer non-FHA backed loans that may allow you to cash out more equity, but tread carefully because you could get hit with a steeper interest rate.
What Option Pays Out More?
The reverse mortgage payout options will vary based upon how you elect to get your money. You can cash out a lump sum, you can get monthly payments (also called a tenure option), and you can also get monthly term payments, which expire after a certain period of time. Finally, you can also get a line of credit that is similar to a HELOC.
Really, your payout options change with age, and go up, like fine wine, as you get older. That’s namely because your repayment options don’t have to span as long if you are older when compared to you taking out the loan while you are younger. A line of credit can be expanded to accommodate for the increased borrowing limit as you age, as can tenure option payments, but not the lump sum option.
Here’s an Example
Use this example to really determine what reverse mortgage payout options are in your best interest.
Presume that a 70-year-old man and his 62-year-old wife own a $200,000 home and are basing their payout on the wife’s younger age (the payouts are based upon the youngest borrower on the mortgage).
The couple in this example would be able to borrow about $80,000. If they chose the line of credit, these monthly payouts, estimated at about $500 per month via the treasury option, would increase by 4.6% each year, provided they used the home as their primary residence. Using the LIBOR calculation, they’d get a lump sum of about $88k, or a line of credit equal to that with annual increases of 3.90%, or they’d get monthly payments of about $535.
As this demonstration expresses, the LIBOR method with monthly payments would net you the most money over time, but would not give you that lump sum buying power of an immediate payout or the convenience of a line of credit nest egg.