Mortgages come in all shapes and sizes, even reverse. But what exactly is a reverse mortgage, and how can it help you? In this guide, we’ll explain the basics and discuss the pros and cons. Let’s find out more.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows senior homeowners to tap into their home equity in exchange for financial gain without having to sell their property. The loan is applicable to homeowners who meet the lender’s age requirements (minimum 62 years old in the U.S., or 55 in Canada), use the property as a primary residence and have at least 50% equity in their home (or 55% in Canada).
It’s called a reverse mortgage because, unlike traditional mortgages, the lender makes payments to the homeowner. These payments can be either a lump sum, term payments or a line of credit. You will still need to pay interest, which is added to your loan balance.
A reverse mortgage becomes due in the following cases: passing away, moving out or selling the property.
Pros of Reverse Mortgage
Easy to Qualify for
Unlike a traditional mortgage, it’s much easier to have your reverse mortgage approved. As long as you meet the age requirements, have enough equity in your home and live on the property, you have a good qualifying chance. Also, you don’t need to worry about inquiries into your credit score or income.
Easy Access to a Non-Taxable Income
A reverse mortgage is a great way to boost your retirement income, but it doesn’t stop there. You can also use the money to consolidate or pay off debt, make repairs or renovations, help your kids and grandkids financially or even go on that dream holiday. And as an added perk, these additional funds are not considered an income, which means they’re un-taxed.
Can Be Used to Pay off the Current Mortgage
This is a popular option for homeowners who have built a lot of equity in their home and want to ditch the monthly mortgage payments. A reverse mortgage can be taken out as a lump sum and used to pay off the mortgage on your current home.
It Allows You to ‘Age in Place’
One of the requirements for a reverse mortgage is that you continue to live on site. Which, let’s face it, doesn’t sound like a bad deal at all. Many homeowners hope to age in place, along with their family and loved ones. The fact that you can make money out of it is a nice little bonus.
Cons of Reverse Mortgage
Hidden Long-term Costs
Reverse mortgages typically come with much higher costs than traditional mortgages. The interest rates and closing costs are higher, as are the insurance premiums. If you’re looking for a short-term solution to boost your finances, going for a home equity loan or a HELOC might turn out to be significantly cheaper.
It Could Reduce Your Home Equity
With a reverse mortgage, you are using your home equity in exchange for a payment made by the lender. Throughout the lifetime of your loan, you will continue to accumulate debt due to interest, which can reduce your home equity even further. As a result, there’s a risk that there will be less money in your home that your heirs can use to pay the mortgage when it’s due.
One of the requirements for this loan is living in the house and keeping it well maintained. This can complicate matters if, for example, you have to move to a nursing home due to illness. Also, failing to prove that your home is your main residence or allowing it to fall into disrepair can lead to a default on your mortgage. As a result, there’s a danger you may lose your home.
Your Heirs Might Not Be Able to Keep the Property
In most cases, your reverse mortgage loan is due when you pass away. This means that the repayment will become the responsibility of your heirs. Depending on their own financial status at the time, your heirs might have to either sell the home or use other financing options to meet the lender’s demands.
Is a Reverse Mortgage Worth It?
You’re never too old to be asked, ‘Where do you see yourself in 5 years?’, and this is what a reverse mortgage boils down to. If you need a long-term income source and plan to live in your home for the rest of your life, a reverse mortgage can be a great choice. On the flip side, your heirs might be left with fewer assets. As with any major financial decision, it’s essential that you weigh up the pros and cons and consult a professional.
This article is intended for informational purposes only and should not be deemed as legal, financial or investment advice or solicitation of any kind. Before purchasing real estate or insurance, always consult with a licensed attorney, financial advisor, insurance agent and real estate broker.