A reverse mortgage is one of the most underused mortgage solutions by those who truly benefit the most. Reverse mortgages are designed to help homeowners of 55 years or older, tap into their existing equity to obtain tax-free cash, while making no payments on the borrowed amount. In other words, you get the money you desire without having to worry about making out-of-pocket payments to repay the mortgage. That’s right, $0.
It has some similarities to a regular, amortized mortgage, but carries a few distinct differences:
- No monthly payment obligations (unless you voluntarily choose to make payments)
- No maturity date
- Age requirement of 55 years or older
- You must own your home
- Only available for a primary residence (investment properties are ineligible)
- The interest portion accrues on the outstanding principal and interest
To elaborate further, since interest payments are voluntary, you are not required to make monthly payments unless you choose to do so. If you opt out of making voluntary payments, the accrued interest for that period is simply added to your ‘tab’ without consequence. In other words, your mortgage will not be deemed in arrears or trigger default. This is starkly different form a typical mortgage in which you are required to make your minimum payments and would be considered in default were you to miss any regularly scheduled payments.
There are typically 2 scenarios in which a homeowner might consider a reverse mortgage solution:
- A homeowner over the age of 55 who owns their primary residence outright (no existing mortgages or registered liens)
- You may want to consider a reverse mortgage to tap into lump sum or scheduled advances of funds to finance your personal needs (i.e.: Buy a car, cover living expenses, or any other personal reason)
- A homeowner over the age of 55 who owns their primary residence, but also has an existing mortgage already
- You would swap out your current, regular mortgage (that presently requires regularly scheduled payments) with that of a reverse mortgage solution (no payment requirements)
If you are interested in learning more about a reverse mortgage solution, or if you need to discuss whether this solution would be right for you or a loved one, we’d be happy to help guide you on the right path forward.
Q: What is a Reverse Mortgage?
A: A reverse mortgage is a mortgage product (offered by select banks) that uses your homes equity to give you access to funds while self-servicing the monthly mortgage payments – this means that you make no payments on the mortgage out of pocket!
Q: What are the eligibility requirements for a reverse mortgage?
- You must be 55 years or older
- You must own your home
Q: How much can I get from a reverse mortgage?
A: This depends entirely on 2 variables:
- Your age
- The market value of your home
Generally speaking, the maximum loan amount that can be borrowed through a reverse mortgage is 55% of the value of your home, but this is also dependant on the age variable. The older you are, the more money you can borrow.
Q: Will I lose ownership of my home with a reverse mortgage? Will the bank eventually kick me out?
A: Absolutely, not! You will maintain full ownership of your home and the bank cannot and will not take your home away from you. Remember, since your mortgage payments are built into the reverse mortgage itself, your outstanding balance of the mortgage will grow overtime (unlike traditional mortgages – hence the reverse aspect). This does not mean that the bank will eventually run out of equity and then take your home away from you. In fact, the banks have strategically worked out their numbers to approve you up to 55% of the current homes value, so that the mortgage balance does not ever exceed the future value of your home. This is also why banks won’t give you up to 80% of your homes value, as in the case of traditional mortgage refinances.
Q: If the balance of the reverse mortgage keeps growing, how do the banks get their money back?
A: This typically happens in one of two ways:
- The homeowner decides to sell their home, or repay the reverse mortgage through other means (investments, savings, lottery winnings, etc.)
- The homeowner passes away and, if there are no other arrangements to repay the reverse mortgage, the home will be sold by the mortgagee to recoup the balance of the reverse mortgage. Since the bank is not allowed to keep any profit from the sale, the remainder of the funds will be advanced to any known beneficiaries.