Will I have equity in my home later if I do a reverse mortgage today?

There are a lot of questions about what happens to the equity in a home when a reverse mortgage is taken out against the property. The big question is simply this- because no payments are made on the mortgage, how could there be any equity left in the property if I need to sell later?

To illustrate the effects of your equity position, let’s look at historical numbers of what happens to the equity in your home. Existing home values have increased on average 5.4% per year for the past 41 years- 1968-2009 (we will discuss the current housing market below). New home sales have increased at a higher rate than this- but that data is somewhat irrelevant as we are using this data for your existing home, not a new home you may be purchasing later. This is a national average and does not hold true in all parts of the country, some areas have experienced higher value increases and others less. However, assuming your home has average appreciation (increase in value), we will compare the equity in your home to the interest rate being charged against your home. Since there is no payment on the reverse mortgage, the loan balance will increase each month as interest does accrue on the loan. We will compare the interest rate of the loan at 5.625%- the average fixed rate option currently on reverse mortgages, to the 41 year average appreciation rate of 5.4%. This means the interest rate is higher than the appreciation rate.

For our purposes, we will use a home value of $150,000.00 and a loan size of $90,000.00 (based on a 60% loan to value ratio- again average for a reverse mortgage. Notice the amount of equity in the home is actually increasing, not decreasing.



The reason you gain equity in this situation is that the appreciation is accruing on the full value of the home, where the interest is accruing on the smaller loan size. To illustrate, if you pay 5% interest in $1,000.00 you pay $50.00 in interest per year. If you have an 8% interest rate you pay $80.00 per year on that same $1,000.00. However, if you only borrow $600.00 at 8% interest you pay $48.00 in interest for the year because you borrowed less money. The same effects are in play on a reverse mortgage because the home value is greater than the loan size. This loan size to home value is referred to as Loan to Value or LTV. For an approximation the LTV you qualify for, use this rule of thumb - the age of the youngest borrower and subtract 10, then put a % sign after that number. Thus a 70 year old individual would qualify for 60% LTV using this formula- if the home value was $150,000.00 the maximum loan size would be $90,000.00. However, other variables apply, including the location of the home and the interest rate being charged. You may use the online calculator for a closer approximation; or for the most accurate numbers request a quote online or call us for detailed information.

So what about today’s market? As of March 2011 housing had fallen to 9 year lows, meaning that a home sells today for the same price as it did in 2001. As a result there are times during a housing crisis that it’s possible to lose equity and owe more on the home than it’s worth. While this is not a common occurrence you will have the peace of mind of knowing that both you and your heirs have protection against those types of home value drops when you have a reverse mortgage. This is where your FHA backed insurance comes into play.

FHA HECM reverse mortgages guarantees you will never have to make a payment on the home, and that you will never be forced to move or be displaced as long as you maintain the home to reasonable standards and pay the property taxes and homeowners insurance on the property. If home values drop, you simply live in the home without making any payments. You are not required to pay back the money you borrowed until you pass away or move, so by staying in the home you never realize a financial hardship from the home value drops in the market place. If you pass away while living in the home your heirs will have 6 months to either refinance the home and keep the equity or sell the home and cash out the equity. However, if the reverse mortgage balance is higher than the value of the home your heirs may choose to give the home to the lender. By doing this they have no responsibility to pay the shortfall and the bank takes the financial loss and sells the home. The result is that the reverse mortgage offers some protection against home value losses while maintaining the home ownership privileges- including the ability to leave the home and equity to your heirs without risking them taking a financial loss if home values drop.

It’s good to know you will usually have equity in your home should you choose to move, and to know that with a reverse mortgage you may still leave an inheritance for your kids- albeit less than if no mortgage is taken out on the home. The bonus of having protection from housing market volatility makes a reverse mortgage an excellent choice for many seniors today. Finally, if home values increase you may also have the option to streamline your reverse mortgage later, usually getting more funds in your pocket at that time. Taking out a reverse mortgage now does not eliminate your options later. Remember, Reverse My Mortgage guarantees the best reverse mortgages and closing costs. Call today for your personalized, no obligation quote and consultation.

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