When you qualify for a reverse mortgage the lender willtake into consideration the value of the home, the age of the youngestborrower, and the interest rate.  Thelender plugs these numbers into an algorithm and out pops how much money youqualify to receive.  It is not a setnumber because of the variables. 



 

Regardless, the borrower will have access to receiveroughly 50% to 75% of the value of the home. The question is how to receive that money.   To answer this the borrower should choosesuch that he or she maximizes long term equity in the home.  This is their money so why waste it bychoosing a poor cash-out option.

 

Three cash out options:

 

1.       LumpSum:  The borrower can simply choose topull all of the money out at one time. This is the simplest and most basic use of the reverse mortgage.  The fixed rate and adjustable rate reversemortgage offers this option.   The ARMmortgages generally allow a greater loan amount and the fixed offers moresecurity.

 

2.       FixedMonthly Payments:  The borrower may wantto supplement income in some way.  Theyreally have two choices here in that the borrower can choose a monthly amountto receive or the borrower can choose to receive a payment for life.  If the borrower chooses the latter thelender's algorithm determines the maximum payment the borrower can receive forlife.  If the borrower chooses theformer, and the amount is more than the lender would choose for a lifelongpayment, the mortgage will have a payment ending date.

 

Only the ARM can accommodatethis product.

 

3.       Lineof Credit:  This is by far the mostpopular reverse mortgage product because it allows borrowers to use theirproceeds as needed.  If the borrowerdoesn't need all of his money today why take it out and pay interest on themoney?  The answer is there isn't, whichis why the line of credit is so popular. The line of credit allows the borrower to take money out as needed andinterest is only charged on moneys used. Any money left in the line of credit does not accrue interest againstthe home's equity. 

 

The line of credit is onlyavailable for ARMs. 

 

Although almost everyone chooses to use a line of creditthey typically combine it with one of the other mortgages.  A typical scenario is to pull a lump sum outat close of escrow and keep the remaining balance in a line of credit.