Reverse mortgages have been quite the hot topic in recent years, with arguments from both sides of the coin. In essence, it can be a reliable source of income for older Canadians who are living off of their retirement pensions or savings. But it can also reap other benefits like being exempted from taxes and getting to remain within the comfort of your home as well.
But like all good things, there’s a fair share of misinformation being passed around and a lack of understanding about its drawbacks, which is why it requires thorough research and knowledge before selection. In this article, experts from Alpine Credits have discussed all that you should know about a reverse mortgage and the implications that come along with it.
What Is A Reverse Mortgage?
It is a specialty loan that allows senior homeowners to leverage their home equity and property without the need to sell it. A home value of up to 55% can be borrowed; the final value percentage will be determined by multiple factors including:-
- The assessed value of the home
- The age of the homeowner
- The lender
There is also no mandatory requirement to repay the loan unless you move away, sell it or pass away. But since you or your family will be reliant on the home’s value to repay the remaining amount, it usually results in not being able to leave the house behind as your inheritance.
As mentioned, this is a loan policy aimed at senior homeowners. Consequently, to be eligible, one must:-
- Be at least 55 years of age or older
- Be the homeowner
All individuals that are listed under the home title must also be the minimum age of 55 years. Moreover, the house that you wish to mortgage needs to be your main residence as well. You cannot lease it to someone else during your application either.
How It Works
Before getting a reverse mortgage, you need to first pay off any pending loans or credits under your home. You can use the money received from the mortgage for the repayments. The remainder of the money received can be used for payment of other things such as:
- Repairs and developments
- Expenses for healthcare
- Debts, etc
At the same time, it can also limit other options for home equity security. For example, you might not be able to apply for a HELOC or similar loans and policies.
The amount from the mortgage can be received as:-
- A one-time lump slump
- Taking a small portion first then asking for the rest over time
As a responsible citizen, you must ask lenders the kind of options provided and whether there are other fees or limitations.
Some apparent pros of a reverse mortgage include the following:
The payout that you receive is not considered as an income. So there are no overhanging taxes charged.
It won’t affect certain other benefits, such as an Old Age Security(OAS) as well, and you won’t be required to pay any taxes for the money received either.
No Regular Payments
Unlike your standard insurance policies or home loans, a reverse mortgage does not require payments to be made regularly, be it monthly, bi-monthly, annually, or any other schedule.
You are only required to pay it back in the event you have sold the house or have passed away. In the case of death, the remaining beneficiaries will be required to pay back the pending amount.
Relish In The Comfort Of The Home
A reverse mortgage does not put your home title at risk. It means that you can reap the benefits of your home equity while you still own it and can continue staying in it as well.
All good things come with their fair share of baggage, and a reverse mortgage is no exception. No matter how efficient it seems, you’ll be faced with some significant problems down the road if you’re not careful. Such as:
Higher Interest Rates
Like many other loans, it also demands a rate of interest that decreases the value of your home equity over the years.
But the main factor that segregates it is that it has a higher interest rate than the typical mortgage or a Home Equity Line of Credit (HELOC).
The Responsibility Shifts To The Estate After Death
Unless your home has been sold off, the responsibility for repaying your mortgage will rest on your estate.
To add to the stress, they will be responsible for paying it back within a given period. This time may be sooner than what would be manageable. The option to pay early is not available either since the early payment can result in a penalty.
Decrease The Size Of Estate
This consequence is determined by higher interest rates, payment of ending costs, accumulation of extra debt, etc. As a result, the amount of estate and equity you leave behind for your family can significantly decrease size and value.
During the application process, the lender considers multiple factors, such as the applicant’s age, property type that is being put up for the policy, location, etc. The result of all these appraisals may end with you not receiving a complete 55% of the total value.
Lenders also tend to favor homes situated in urban localities and homes in superior condition so that they’d be easier to sell in the future.
A reverse mortgage comes with its own sets of benefits and drawbacks. Suppose you’ve done your end of the research, spoken to a trusted advisor, and are confident enough. In that case, it can be an excellent way to get a comfortable retirement and additional income.
But if you have any alternative or additional ways for your retirement funding, you should also look into those. Remember that whatever choice you make, you must make it after proper research and information gathering.