Like me, you’ve probably seen or heard one of those corny commercials about “Reverse Mortgages” and no doubt, like me, you probably yawned your way right through… Well, while we both can agree that these commercials are certainly not Oscar worthy, if you’re above age 55 or have parents who are and own a home, then the next few minutes might be worth a listening ear.
“What is it & who is it for?”
A reverse mortgage is a special type of mortgage loan designed for homeowners 55 years of age and older. The loan is secured against the built up equity in your home (equity is the difference between the value of your home and the balance you owe) and allows you to access a pool of cash without having to sell your property.
“So how does it work exactly?”
Well, you don’t make any payments with a reverse mortgage. What happens instead is the interest accumulates, decreasing the equity that you have in the property over time. Bare in mind as well that if you sell the property, or the home is no longer a principal residence, you must repay the loan and any interest that has accumulated.
As our parents or we-ourselves grow older, evaluating every available financial option at our disposal is simply the wise thing to do. A Reverse Mortgage is certainly not for everyone; but like all financial instruments, if approached strategically with expert guidance, the benefits might easily outweigh the costs. Here is a list of Pros & Cons for you to consider:
- There are no regular payments on the loan.
- You can turn some of the value of your home into cash, without having to sell it.
- The funds borrowed is a tax-free source of income.
- This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be receiving.
- You maintain ownership of your home.
- You can decide how you want to receive the money. You can choose to receive:
- a lump-sum payment
- a loan to set up planned advances that provide you with a regular income
- a combination of these options.
- Reverse mortgages are subject to higher interest rates than most other types of mortgages.
- The equity you hold in your home will decrease as the interest on your reverse mortgage accumulates over the years.
- At your death, your estate will have to repay the loan and interest in full within a limited time. The time required to settle an estate can often exceed the time allowed to repay a reverse mortgage.
- Since the principal and interest will be repaid to the lender at your death, there will be less money in your estate to leave to your children or other heirs.
- The costs associated with a reverse mortgage are usually quite high. They can include:
– A higher interest rate than for a traditional mortgage or line of credit
– A home appraisal fee, application fee or closing fee
– A repayment penalty for selling your house or moving out within three years of obtaining a reverse mortgage
– Fees for independent legal advice