A Reverse Mortgage is intended to provide those over 55, the option to use some of the equity you have earned with regards to your home.
What is a Reverse Mortgage?
A reverse mortgage is a loan designed for homeowners 55 years of age or older (if you are married, you both must be 55 or older). The mortgage itself is secured by the equity in the home (the portion of the house that is debt free) and allows homeowners to obtain cash without having to sell their home, or have monthly payment obligations.
As quoted by Ratehub, the average age of a reverse mortgage applicant is 72, and typically, they borrow approximately 36% of the equity they have. When the reverse mortgage is paid off, there’s almost 50% equity remaining in the home.
There are three ways to access the funds in a reverse mortgage: in a lump sum all at once, in scheduled withdrawals, or a combination of the two.
How does it work?
Unlike traditional mortgages, there is no need to make regular or lump sum payments on a reverse mortgage. Instead, interest accrues on the mortgage and your equity decreases over time. If/when you sell your home, the loan must be repaid along with any interest that has accumulated. With this type of mortgage, your home would remain in your name and you are still on the title, just like any other mortgage.
The loan can be up to a maximum of 55% of the homes current value, but you must also pay off any other outstanding loans that are secured by your home with the funds received from the reverse mortgage. The minimum amount of a reverse mortgage is typically $20,000, but the specific amount is determined by an appraisal.
Advantages of reverse mortgages:
Although reverse mortgages can be a controversial topic, there’s no denying that there are benefits for the individuals who qualify and obtain this type of mortgage. Some of those advantages include:
- you don’t have to make any regular payments
- you can turn value of your home into liquid cash without having to sell it
- the money you borrow is a tax free income source
- income does not affect Old Age Security or Guaranteed Income Supplement
- you continue to own your home
Disadvantages of a reverse mortgage:
- reverse mortgages are potentially subject to higher interest rates than traditional mortgages
- the equity you hold in your home will decrease over time as the interest accumulates on the reverse mortgage
- at your death, your estate will have to repay the loan and interest in full within a limited time
- the fact that the interest accumulates will leave less money in your estate
- Individuals may choose a reverse mortgage instead of another more suitable product. Although this point is a potential disadvantage, CVE Mortgage Group will help advise you according to your current situation so that you end up with the right Mortgage Option.
It is very important that individuals considering a reverse mortgage take the time to talk with a financial advisor before making that decision. Without that discussion, there is the possibility that there’s another mortgage or loan product available that wouldn’t decrease the equity in the home.
The Financial Consumer Agency of Canada (FCAC) notes that the costs associated with a reverse mortgage can be quite high. A higher interest rate, closing costs, an appraisal fee and fees for independent legal advice are all higher than for traditional mortgages and other products. These are costs that are deducted from the reverse mortgage itself, from the equity in your home, right off the top. Also, there’s a chance that you may face a repayment penalty if you sell your home or move out within the first three years of obtaining this type of mortgage, according to the FCAC
How do you qualify for a Reverse Mortgage?
Qualifying for a reverse mortgage is typically based on how much equity you have in your home. Your age, the appraised value of your home, current interest rates, and where you live. The older you are, the larger the loan you will be able to get, typically.
There are many reasons that Canadians are choosing to obtain a reverse mortgage on their homes. Often, the choice to obtain a reverse mortgage boils down to one’s quality of life. Some need the money for everyday expenses or to pay off something that has unexpectedly come up, others want to have a cushion that they believe means less stress later.
Borrowers often choose a reverse mortgage for the following reasons:
They have debt that they need to pay off because it is limiting their ability to borrow from the bank.
They want to have funds available without a monthly payment.
They can’t make ends meet.
They have unexpected financial needs.
If you see yourself in any of those situations or you have questions about whether a reverse mortgage is the right choice for you, CVE Mortgage Group, Inc. is here to help. We work with many lenders and can help you to determine whether a reverse mortgage is the right choice for your situation. Contact Colin Eby, Mortgage Broker, owner of CVE Mortgage Group, today to learn more about how he, or his Mortgage Agents can assist you and your family.