How Much Equity Do I Need for a Reverse Mortgage

If you Google search “how much equity do I need for a reverse mortgage,” a common number will emerge: 50%.

While that number is not untrue, it should be considered the absolute minimum.

A reverse mortgage may or may not work for your financial situation. But if you decide to apply for a reverse mortgage, having more than 50% equity in your home may be to your advantage.

Why 50% may not be enough equity for a reverse mortgage

While there is no specific minimum equity requirement for a reverse mortgage, having 50% equity in your home may not be sufficient to qualify for or make a reverse mortgage financially worthwhile.

The higher mortgage rates go, the less is available to you with a reverse mortgage.

That’s because lenders want to make sure there’s enough equity to last the rest of your life. The higher the interest rate, the faster the principal balance grows.

At today’s rates, you may be eligible for very little reverse mortgage funds, especially if you’re younger.

According to Lending Tree, you would need a home worth $700,000 to pay off an underlying loan of $300,000 at the age of 65 and with today’s rates. That’s 57% equity. But keep in mind that’s just to eliminate your monthly payment. It doesn’t allow you to reap the other benefits of a reverse mortgage, as detailed next.

1. You may not be eligible for a line of credit

A reverse mortgage line of credit allows you to access your home’s equity as needed.

However, with only 50% equity, you may not qualify for a line of credit to meet your future financial needs. You may be able to pay off your existing loan and eliminate your payment. If that’s your only goal, a reverse mortgage might work.

But a big advantage to a reverse mortgage is the ability to draw funds for ongoing needs in the future.

To get a line of credit of $85,000, your home must be worth $1 million and have an existing loan no more than $300,000 and be 70 years or older,  according to a calculator provided by the National Reverse Mortgage Lenders Association (NMRLA). That’s equity of 70%, high above the common often-recommended 50%.

2. You may not be eligible to receive an upfront lump sum

Another feature of a reverse mortgage is to receive a lump sum at closing to pay off debts, perform home upgrades to enable aging in place, or other purposes.

Yet, with just 50% equity you may have a hard time getting an upfront payout at all.

According to NMRLA’s calculator, you would need a home worth $500,000 and an existing loan of $150,000 at age 65 to get an upfront payout of $20,000.

Again, you would need 70% equity even for a relatively small payout upfront.

In this scenario, what if you had 50% equity? You wouldn’t be eligible for a reverse mortgage at all.

3. You may not be eligible to eliminate your current mortgage payment if you’re under 70

One of the biggest benefits of a reverse mortgage is the ability to eliminate your current mortgage payment, as the reverse mortgage pays off your existing mortgage.

However, with only 50% equity, you may not be eligible o pay off your current mortgage entirely, especially if you are under 70 years old.

Someone who is 62, the minimum age for a reverse mortgage, would need an $800,000 home with an existing loan of $250,000. The result? Able to pay off their mortgage and have no payment, but that’s about it. They would need way more than their current 68% equity if they wanted a line of credit, lump sum payout, or payments back to them.

4. You may need to come in with cash to close a reverse mortgage

In some cases, having 50% equity may not be enough to pay off the existing mortgage plus cover the closing costs and fees associated with a reverse mortgage. You may need to come up with additional cash to close the loan, which can be a significant financial burden for some borrowers.

According to a calculator provided by Fairway Independent Mortgage, someone age 65 with a home worth $800,000 and an existing loan of $400,000 would face quite a bill at closing, even though they meet the touted 50% equity threshold. At closing, they would need to come in with $138,000 to eliminate their mortgage payment, says the calculator.

What if you don’t have that much equity?

If you don’t have at least 50% equity in your home, you may still be able to qualify for a reverse mortgage, depending on your age, the value of your home, and the interest rate on the loan.

However, the loan amount you can borrow will likely be lower, and you may face higher fees and closing costs.

It’s essential to carefully consider whether a reverse mortgage is the best option for your financial situation and explore alternatives that may better suit your needs.

Alternatives to reverse mortgages

If a reverse mortgage isn’t the right fit for you, there are other options to consider for accessing your home’s equity.

Home equity loans

Home equity loans enable you to borrow a lump sum of money based on your home’s equity, which you then repay over a fixed term with fixed monthly payments.

This option may provide lower fees and closing costs than a reverse mortgage, but you will be required to make monthly payments, which can be a burden for some homeowners.

Home equity line of credit (HELOC)

A HELOC is, in a basic sense, a revolving line of credit that enables you to borrow against your home’s equity as needed. Like a home equity loan, you will need to make monthly payments on the borrowed amount, but you have the flexibility to choose how much you borrow and when.

Downsizing

Selling your current home and purchasing a smaller, more affordable property can free up home equity and reduce your ongoing expenses, such as property taxes and maintenance costs.

Renting out part of your home

If you have extra space in your home, you may be able to generate income by renting out a room or an entire floor. This can help supplement your income without the need for a loan.

Government assistance programs

There may be state or federal assistance programs available to help you with expenses such as property taxes, home repairs, or healthcare costs. These programs can provide financial relief without the need to take on additional debt.

Tips for reverse mortgages

If you are considering a reverse mortgage, it’s crucial to carefully evaluate your options and make an informed decision. The following are some tips for evaluating your reverse mortgage options.

Understand the different types of reverse mortgages

Familiarize yourself with the various types of reverse mortgages available, including single-purpose, HECM, and proprietary reverse mortgages.

Each type has unique features, benefits, and drawbacks, so choosing the one that best fits your financial needs is important.

Compare loan offers from multiple lenders

Like any loan, reverse mortgage terms and fees can vary significantly between lenders. Be sure to shop around—compare loan offers from multiple lenders to find the best deal.

Consider the cost

Reverse mortgages can be expensive, with high fees and closing costs. Ensure you understand all the costs associated with the loan, including the interest rate, origination fees, and ongoing maintenance requirements.

Seek professional guidance

A reverse mortgage is a specific and complex financial product. It’s essential to consult with a qualified professional, such as a HUD-approved housing counselor, a financial planner, or an attorney, before making a decision.

Consider your heirs

A reverse mortgage can impact the amount of equity left in your home, which can affect your heirs’ inheritance. Be sure to discuss your plans with your family and consider their input when making a decision.

50% equity? It still may be worth applying

Even if you don’t think you can qualify, it’s worth applying for a reverse mortgage. There are a lot of moving pieces to these loans, and your age can affect your available funds.

Start the reverse mortgage process to see if it’s the right program for you.