How a lot fairness is required for a reverse mortgage?
When you retire, you may be wondering how you can cover the expenses that were previously covered by your income. If you own a home and have paid back your mortgage in full, you can use that equity in your home by taking out a reverse mortgage. However, lenders often require that you have built up some equity before offering you such a loan.
What is a reverse mortgage?
A reverse mortgage is a type of home loan that is typically used by retirees or retirees to gain access to some of the equity that they have built up in their homes to pay for their living expenses. You can choose from either a lump sum, an ongoing payment, a line of credit, or a combination of these options. This money can be used to top up your pension, settle housing and medical expenses, buy another property, or cover the cost of moving to assisted living.
The main benefit of using a reverse mortgage as opposed to other loans is that you don’t have to make repayments while you live in the property. However, you have the option of making voluntary repayments. You must repay the reverse mortgage in full, including any interest accrued and any fees, if you or your estate were to sell the property.
How Much Equity is Required for a Reverse Mortgage?
Typically, in order to take out a reverse mortgage, you must have 100 percent equity in the property, meaning that you have paid back your mortgage in full. Some lenders may allow you to take out a reverse mortgage even if you still have a small balance on your home loan. However, this can affect how much money you can get on your reverse mortgage.
How Much Can You Get With a Reverse Mortgage?
The amount you can borrow for a reverse mortgage depends on your lender, property value, repayment period, mortgage lending value (LVR), and most importantly, your age. Every lender who offers reverse mortgages has a minimum and maximum limit, usually based on the LVR that you can borrow. Your age usually has the greatest influence on the amount you borrow; The older you are, the higher your creditworthiness.
You won’t be able to run into negative equity (if you borrow more than your property is worth), and each lender has their own set of limits. The general guidelines lenders follow are:
- When you are 60, you can borrow between 15 and 20 percent of the value of your property.
- As you get older, your creditworthiness increases by 1 percent per year.
- Up to the age of 70 you can borrow up to 25-30 percent.
- By the age of 80, it’s around 35-40 percent.
To get a rough idea of the amount you might be able to borrow, we recommend using the ASIC Moneysmart reverse mortgage calculator. Just answer a few simple questions about your age, property value, and number of borrowers and you will get a rough idea of what you can potentially borrow.
How Much Does a Reverse Mortgage Cost?
As with any other mortgage on the market, a reverse mortgage has various fees that you will have to pay. Some of them are:
- Formation fee: $ 500- $ 995
- Application for an increase in the credit line: $ 395- $ 950
- Application for renting, dividing or easing the property: $ 0- $ 500
- Ongoing administration fee: Up to $ 12
- Loan discharge fee: $ 300- $ 400
A reverse mortgage also charges interest which is compounded and added to your loan amount unless you make repayments. Interest rates vary depending on the lender, but are generally 1% higher than traditional home loans.
A reverse mortgage seems like a great way to get some cash flow when you have high expenses and are no longer making a steady income. However, it is a huge financial obligation at a time when you may want to relax and enjoy life. Before taking out a reverse mortgage, it may be wise to speak to a financial advisor. They can explain all of the effects of the mortgage on your current and future financial condition.