If you’re close to retirement, a reverse mortgage can provide you access to extra income for a vacation, home improvements, medical bills, and to maintain your lifestyle. If you are a homeowner, this guide will show you how to use a reverse mortgage calculator, the types of reverse mortgages, qualification requirements, and tax implications you should be aware of so you can make informed financial decisions.  

What Is a Reverse Mortgage?

A reverse mortgage is a type of loan that allows homeowners above the age of 62 to borrow money against their homes, offering a solution for managing mortgage debt in retirement. Borrowers can get paid for their property without having to move out or sell. You’ll not be required to pay off the loan until you sell your home, move, or die.

A reverse mortgage is a financial strategy that many homeowners use to generate income during retirement. Unlike a traditional mortgage, it’s a line of credit that a lender pays you. The amount of money you can get will depend on your life expectancy and the equity of your property. You can withdraw as and when you need it from the line of credit.  

How To Use the Reverse Mortgage Calculator

A reverse mortgage calculator is an easy and quick way to estimate how much you can expect to get when you apply for a reverse mortgage. It takes several factors into account, such as your age, your existing mortgage balance, and your current home value.

What Information Do You Need?

If you’re thinking about borrowing a reverse mortgage, you can determine how much you may qualify to get as a lump-sum payment in as little as one minute. Typically, you don’t need to provide any personal information to get this estimate. Here’s a look at the information you’ll need to use a reverse mortgage calculator:

  • Start by inputting your estimated home value. The amount you’ll receive will be a percentage of your home’s value, and when you apply for a reverse mortgage, your home will be appraised. When using the calculator, you only need to provide an estimated value of your home.
  • You’ll also need to provide your mortgage balance information. Check your statements or contact your lender to figure out your current outstanding mortgage balance.
  • Another requirement for using the calculator is the youngest borrower’s age. For a standard HCEM reverse mortgage, you’ll need to be age 62 or older. If there’s more than one borrower on the mortgage, input the age of the youngest borrower.
  • Additionally, you’ll also need to select a reason for borrowing a reverse mortgage.

Once you add all the details listed above, the calculator will provide you with an estimated loan amount. With this information on hand, you can decide to approach multiple lenders to compare their offers.  

Calculators Can’t Predict the Future

When using a reverse mortgage calculator, it’s important to remember that it’s for illustrative purposes only. This means that the tool will only give you a general idea of the loan amount. The amount you’ll get when you apply for a reverse mortgage will depend on a number of factors, such as the property value at the time. A calculator cannot predict the interest rate you may get or the exact amount a lender may offer you.   

Requirements for a Reverse Mortgage

A reverse mortgage can be a viable option for senior homeowners to withdraw from their home equity to get out of debt and meet their financial goals. But, you may only be able to get a reverse mortgage if you meet the eligibility requirements listed below:

  • You’ll need to be at least 62 years old.
  • The home you are securing the loan against should be your primary residence.
  • You must have at least 50% equity or more in the house.
  • You’ll need to attend a counseling session with a HUD-approved counselor.  
  • You must continue to pay homeowners’ insurance and property taxes.

Costs and Fees

Just like a conventional mortgage, there are several costs and fees associated with a reverse mortgage. This includes several upfront costs, as well as ongoing expenses that you’ll need to keep up with even though you won’t have to pay monthly payments.

  • For HECM reverse mortgages, loan origination fees are capped at $6,000. Lenders can’t charge more than $2,500 on the first $200,000 of your home’s value plus 1% on the appraised value over $200,000.
  • You’ll also need to pay an Initial Mortgage Insurance Premium (MIP), which is 2% of the loan amount.
  • There may be other real estate closing costs, such as property appraisal and inspection.
  • You’ll also need to pay a servicing fee to the loan servicer to cover the expense of distributing the loan proceeds and sending you account statements.
  • You’ll be responsible for paying the homeowner’s insurance costs and property taxes.
  • Another expense is the annual property mortgage insurance premium, which is 0.5% of the outstanding mortgage balance.  

3 Different Types of Reverse Mortgages

When borrowing a reverse mortgage, you’ll have three different options to choose from. Each option works differently, so it’s important to compare them carefully before you decide which one is right for you.

1. Home Equity Conversion Mortgages (HECMs)

HUD backs home equity conversion mortgages (HECMs), which are usually more expensive than conventional mortgages because of the upfront costs. It’s also the most commonly used reverse mortgage because borrowers can use the loan proceeds for any purpose, and there are no medical requirements or income limitations. If you’re eligible, you can choose a term option that provides you cash advances each month for a fixed period of time. You can also opt for a tenure payment option for monthly advances if it’s your primary residence or a credit line that allows you to withdraw funds at any time.

To qualify for an HECM, you’ll need to meet the following conditions:

  • Be 62 years of age or older.
  • Own the property outright or have considerable equity.
  • Use it as a primary residence.
  • Participate in a counseling session with an HUD-approved counselor.
  • Have the ability to pay property taxes, homeowner association fees, and insurance.
  • Not be delinquent on federal debt.

2. Proprietary Reverse Mortgages

A proprietary reverse mortgage is backed by a private lender, not by the federal government. This option is preferred by homeowners whose homes are appraised at a higher value or those who want more money. In some cases, you may need to attend counseling before you can apply for the loan.

Just like HECM, you can opt for monthly payments or a lump sum with a proprietary reverse mortgage. These loans also do not require mortgage insurance premiums or other up-front costs because they are not federally insured. This may be a better option than HECM if your lender is offering you a lower interest rate, but it’s best to compare quotes from both types of reverse mortgages to determine which may be a better deal for you.

3. Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages are offered by local, state, and nonprofit agencies. Nonprofits and the government back these loans, so they’re the least expensive option. When compared to proprietary reverse mortgages or HECM, homeowners typically pay less in fees and interest charges. The only drawback with this type of loan is that it can only be used for the purposes that the lender specifies. Also, these loans are not available in every state.

Reverse Mortgages Vs. Conventional Mortgages

Reverse mortgages do not work the same way as conventional mortgages. Here are the main differences between the two:

  • Age Requirement: With conventional mortgages, there is no age requirement. If you’re applying for an HECM reverse mortgage, you’ll need to be at least 62 years old.
  • Credit Score: There are no credit score requirements with reverse mortgages, but with a conventional mortgage, you’ll need to meet the minimum credit score requirement of your lender.
  • Loan Term: Conventional mortgages come with loan terms varying from 10 to 30 years. There is no fixed loan term with reverse mortgages.
  • Repayment: When you borrow a conventional mortgage, you’ll need to make monthly payments to repay the loan. With a reverse mortgage, you don’t have to make monthly payments. The balance of the loan, along with interest, is due only when the borrower sells the home, dies, or moves.
  • Interest Rate: Borrowers can choose from adjustable and fixed rates with a conventional mortgage. With a reverse mortgage, you’ll only be able to get a fixed interest rate with the lump sum option. Other types of disbursements are available with adjustable rates.

Reverse mortgages are only available to borrowers that meet the age requirements. If you are eligible, this option may be right for you if you want to leverage your equity, do not want monthly payments, and want to spend the funds for any purpose. This is also a good option for you if you want a non-recourse loan. This means that you’ll never owe more than your home’s balance or value. Your other assets will not be at risk to make up the difference between your home’s value and your loan balance.

Tax Implications

A reverse mortgage can be a helpful tool for retirement because you can tap into the home equity without having to worry about an additional monthly payment or selling your home. However, it’s also important to understand how it may impact your tax liability and your estate planning.

Taxable Income and Deductions

The reverse mortgage payments you receive are not income. This means that you will not have to pay any income taxes to the IRS. Additionally, it won’t affect your Medicare or Social Security benefits because it’s not an income. The funds you receive through a reverse mortgage may count as assets, so it may impact your eligibility for Supplementary Security Income.

Any interest that you accrue on the loan is not deductible because it’s considered interest on home equity debt. This means that if you use the loan funds for paying medical bills, you won’t be able to deduct the interest.

Inheritance and Estate Planning

Your reverse mortgage will be due after your debt. The lender can sell your home to pay off the outstanding balance of the reverse mortgage, or your heirs can pay it off by refinancing the property or from their own funds. If the property is put on sale, your estate will receive the funds from the sale and will then pay off the loan. The loan balance may be much higher than the amount you originally borrowed because interest accrues over the life of the loan.

Final Thoughts on Reverse Mortgages

If you are over 62 years of age, a reverse mortgage can help you deal with a change in your financial situation, such as when your living expenses increase or your assets or income sources begin to dry up. 

There are several perks with a reverse mortgage, such as no monthly payments, but you may want to explore alternatives, such as HELOCs and home equity, before committing to this option. 

Brad Reichert, Founder and Managing Director of Reichert Asset Management LLC offers this advice:

“A reverse mortgage can be a complicated agreement and is not something you should rush into,” Reichert says. “If you feel you’re being pressured or do not fully understand any part of the terms of the loan, you are always free to walk away and seek other alternatives.”

Another option may be to downsize to a smaller home, which can provide you access to the funds you need while allowing you to keep more equity in your home to pass along to your family or other heirs. Whatever you choose, it’s important to determine which option best fits your financial situation and future plans.