March 8, 2012

You Need At Least 45% Equity for a Reverse Mortgage

I was watching an episode of Suze Orman program some time ago and a viewer asked about a reverse mortgage.   The womans mother owned a home worth about $100,000 and she still owed around $70,000.   The woman thought she could get a reverse mortgage on the property.    I don't know if its obvious to many people or not, but you do need a substantial amount of equity in your home to get a reverse mortgage.   

I checked the MetLife reverse mortgage calculator to see how much equity you might need.   I put in some test figures for different amounts of current debt on the property.    I found that about 55% loan to value is around the break even point.   So for example if you have a home worst $100,000 and there is a $55,000 loan then you can get a reverse mortgage that will pay off the mortgage and thats about it.  If the house value and loan value are larger then it mostly scales to the same percentages.    If your debt level is any higher than 55% LTV then you would end up having to pay in money to settle the reverse mortgage.  The banks may let you do that but its not really what most people are expecting to do when they setup a reverse mortgage.

You should expect to have at least 45% equity in a home before a reverse mortgage will even pay off the existing mortgage.

This isn't a hard fast rule, I'm sure it varies based on current interest rates, market conditions, the lender or other factors.   Your own age will of course have an impact on it as well as if theres a spouse in the situation.

I've said before that I think reverse mortgages can be a great solution in some cases.   They should not be your retirement plan and if you can afford retirement otherwise then you should avoid a reverse mortgage.   But if you find yourself of retirement age with little income, not much cash or retirement account assets and a house with a lot of value then a reverse mortgage could be an option. 

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