We hear the term and we hear it often, but many of us have a hard time understanding exactly what it is. What is a reverse mortgage?
What is a reverse mortgage? A reverse mortgage is a mortgage product available to home owners 55+ years of age (all applicants on title would need to fit this age bracket in order to qualify). There must be sufficient equity in the home and not all banks will offer this product. The reverse mortgage allows you to use the equity in your home with no payment obligations.
What is a reverse mortgage used for? The uses are really endless. A reverse mortgage allows qualified home owners to cash out a portion of their equity (the debt free portion of their home) to a maximum of 55% of the current home value. The home value is determined by the bank by way of an appraisal or assessment. Typically, no payments are due on the reverse mortgage until sale of the home or transfer of the title at which point the accumulated interest payments on the reverse mortgage will be due as a lump sum. You can choose to receive the money in either a lump sum, or installments.
What is a reverse mortgage benefit? The biggest benefit of a reverse mortgage is that you can get money in hand while keeping ownership of your home. Selling your home should not be the only way to use the equity you’ve worked hard for. Getting a regular amortized mortgage requires a significant amount of income, income in which your OAS, GIS or CPP may not cover. How else would one pull out the equity from their home without depending on the help of family and friends? No payments are required on this mortgage and the income generated by this reverse mortgage is not taxed nor does it affect the benefits you may currently be receiving.
What is a reverse mortgage disadvantage? One of the major disadvantages of a reverse mortgage is that unlike a regular amortized mortgage, a reverse mortgage will decrease your equity over time rather than increase it. The reason for this is because even though there are no regular payments due on your reverse mortgage, there is an interest rate associated with borrowing the money and the interest will accumulate over the course of time you have it thus becoming due on the sale or transfer of title. On a positive note, you’ll still continue to gain natural appreciation in your home. The costs and interest rate on a reverse mortgage can be expectedly higher than your typical mortgage as well and may include costs such as (appraisal, independent legal advice, application fee, etc.).
Things to keep in mind and things to ask your broker:
Keep in mind – There are other options to obtain equity from your home, some more affordable than others. You may not be able to pull out as much equity as a reverse mortgage is willing to offer, but it doesn’t hurt to try. Other ways of obtaining equity could be; line of credit or regular mortgage, downsizing by selling and purchasing a less expensive home, selling your home to a family member with the right of living there continuously, etc.
Don’t forget to ask us about – What are the final costs associated with obtaining a reverse mortgage? What happens if you move or die? What are the penalties to break the reverse mortgage at the time of selling? How long do you have to repay the reverse mortgage loan once breaking and selling?
We have much more information to share, so make sure to speak with us before making a decision. Contact us today to learn more.