All You Need to Know About Reverse Mortgages
You’re thinking of retirement or are already retired and not sure what to do financially. You’re house rich and a little strapped for cash. Or you want to take that dream vacation to Europe and need a little extra to enjoy the trip. The good news is that you can leverage the value in your house by getting a reverse mortgage!
What is a Reverse Mortgage?
A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. This is sometimes called “equity release”. You may be able to borrow against the current value of your home and convert it into tax-free cash. The maximum amount you can borrow is determined by your age, your home’s value and your lender. You have the choice to receive your money as a lump-sum upfront, or as a lump-sum with advances over time.
“The concept of reverse mortgages actually dates back to 400 B.C.” says Trevor Grant who is an Accredited Mortgage Professional with HomeEquity Bank. They offer the Canadian Home Income Plan (CHIP) so clients can maximize the value of their home. Grant says that a reverse mortgage “is really not much different than a regular mortgage. The only main difference is clients are not required to make any payments on the mortgage and they pay off the loan when the house is sold. Due to the fact there are no required repayments, our qualification process is less stringent than what a regular bank would need.”
This is why a reverse mortgage can be particularly valuable in situations where you need cash but don’t want to sell your house. Many people don’t realize that they can tap into the equity they’ve built in their home over the years. A note of caution: a reverse mortgage is designed for people over the age of 55. If you own a property with someone else, you both have to be over the age of 55 in order to qualify.
Grant goes on to explain how it can be “extremely difficult for a retired individual to live on OAP and CPP income alone. Many individuals struggle from month to month paying their basic bills however they have an untapped source of income that they can access to live the lifestyle they deserve.”
Benefits and Drawbacks
The best part about a reverse mortgage is that you don’t need to make regular payments. You keep the money until the house is sold or the final owner of the property is deceased. The loan is then deducted from the proceeds of the sale. Keep in mind that interest will be charged every year that you have the money borrowed. The interest charged is added to the principle so it will compound over time (the reverse of long term investing). Also, interest rates on a reverse mortgage tend to be higher (and therefore more expensive) than a traditional mortgage. It would be easy to forget about your loan because you don’t make payments only to realize many years later that the sale of your home gets you nothing!
Another potential drawback is if you want to repay your loan early. You have the option to repay the loan at any time although you may face a fee to make an early payment. Also be cautious about the conditions you sign as it could lead to default. Be sure to read carefully all documents before signing
What are the Options?
A reverse mortgage isn’t the only choice. You can consider downsizing to leverage your home’s value with the added bonus of minimizing your bills. Downsizing also reduces the amount of work you need to do on your house which means you could afford to live in a smaller space for longer. Another advantage of downsizing is moving to a space with easier physical access such as a bungalow instead of a townhouse. If you are considering downsizing or selling to move to assisted living, you may want to read up on how a Seniors Real Estate Specialist (SRES) can help.
Having said all this, if you have sentimental attachment to a place where you raised your family or grew old with your partner, you may not want to sell it. A reverse mortgage could be the right option for you if you want to maximize the value of your home without sacrificing your cherished space.