Between 2007 and 2012, home values plunge an average of 35% across the nation. In some areas like Florida, Nevada, California, and Arizona, home owners loss as much as 60% of their homes’ value--and home equity.
Home equity refers to the difference between the market value of a home and the amount of mortgage debt carried on the property. For example, if your home has a market value of $250,000 and you owe the bank $125,000 on your home mortgage; your equity is $125,000.
In the fourth quarter of 2011, home equity for U.S. homeowners dropped to a low of $6.45 trillion, according to figures released by the Federal Reserve. From January to September 2012, the trend reversed, with home prices rising 20%. Homeowners experienced a $1.3 trillion increase in home equity to $7.71 trillion.
Home price appreciation presents good news to all homeowners—especially retirees or and people close to retirement who plan to tap into their home equity to finance their lifestyles. Increasingly, a common option for older homeowners who have equity in their homes is to use that wealth to obtain a reverse mortgage or complete a reverse mortgage refinance.
Retirement and reverse mortgages
A reverse mortgage refers to a financial instrument that allows borrowers 62 years and older to use the equity in their home to receive a loan. The mortgage only has to be repaid if the borrower moves, sells the home, or dies.
Borrowers can use the money for any purpose, including travel, long-term care, assisted care, assisted facility, in-home medical care, or home maintenance and repairs.
Some banks offer reverse mortgage products. The most popular reverse mortgage product is the home equity conversion mortgage (HECM) offered by the Federal Housing Agency (FHA). This product has a national lending limit of $625,000 through the end of 2013.
Whether you complete a reverse mortgage transaction with a private lender or a home equity conversion mortgage (HECM) offered by the government—the money to fund your retirement or other needs is tax-free.
Refinancing your reverse mortgage
The low interest rates make a reverse mortgage refinance attractive to many retirees. The lower interest rate means borrowers will pay less interest over the term of the loan. In addition, borrowers who need more money to finance their golden year should consider reverse mortgage refinancing.
Typically, reverse mortgage refinancing does not require borrowers to meet credit or income underwriting standards. As long as you have the necessary home equity, you can request an increase cash payout based on the home’s appreciation.
The formula for figuring how much a homeowner can qualify to borrow when refinancing a reverse mortgage depends on the home's value, current mortgage interest rates, and the borrower’s age. The following limit caps how much of your home equity you can withdraw:
Total limits – This amount refers to the total amount a person can borrow— up to 80% of the equity interest in the home. As the value of the home appreciates, the borrower can withdraw more up to the predetermined limit.
Annual limits – Each year, The Department of Housing and Urban Development (HUD) determines the “annual upper limits” that a person can borrow. Again, the nation upper limit is $625, 000. The annual upper limits depend on where you live. Check with a local lender to find out the amount for your area.
The closing costs, for reverse mortgage refinance can run about 5% of the home’s value. First determine how much longer long you plan to live in your home. If you intend to move in two or three years, refinancing your reverse mortgage may not make financial sense because you will have to pay off the loan. People who have retired, own a valuable home and have a low cash flow make the best candidates for reverse mortgage refinance.