All About Reverse Mortgages
While there are many different mortgage options out there, there is one type of mortgage available for seniors: a reverse mortgage. This article will be your comprehensive guide to reverse mortgages, what they bring to the table, and how they may be beneficial.
What is a Reverse Mortgage?
The simplest explanation for this is that it is a type of mortgage loan that is available only to homeowners 55 years old and above. In essence, it lets them convert part of the equity that is in their homes into cash.
Initially, this was a product that was created with the idea of helping retirees with limited income stay in their homes. This is achieved by using the accumulated equity in their homes to cover health care and basic living expenses. When it comes to reverse mortgage proceeds, there is no limitation or restriction on how the proceeds can be used.
It is called a reverse mortgage because instead of making monthly payments to a lender – like a traditional mortgage – the lender makes payments to the borrower.
With this type of mortgage, the borrower isn’t required to pay back the loan until the home is sold, vacated, or everyone on the title passes away. So long as the borrower lives in the home, they are not required to make monthly payments towards the loan balance. However, there is still the matter of remaining current on property taxes, HOA dues where applicable, and homeowners’ insurance.
Knowing the Basics of Reverse Mortgages
Knowing the different types of reverse mortgages can be beneficial when it comes to making the selection that fits you best. We will get into each kind in detail. There are a few details, however, that lenders will generally look for. These are:
- Your age as well as the age of your spouse if they are listed on the title of your house
- Where you live
- The condition of your home, its type, and its appraised value
A good rule of thumb to consider is that the older you are and the more equity you have in your home, the more money that you could get. This is, of course, impacted by current market trends, so keep that in mind. You could even use the money from the reverse mortgage to do this.
If there is a remainder left, you can use it for a wide range of things like:
- help with regular bills
- cover healthcare expenses
- pay for home repairs or improvements
- repay debts
There is a lot of flexibility when it comes to how you spend your loan, making it one of the more versatile options out there.
How to Access the Money from a Reverse Mortgage
There are a couple of ways to get access to the money from your loan. This can be achieved by either taking the money in a one-time lump sum, for starters. It can also be taken in an upfront portion with the rest over time.
Generally, it’s good to ask your lender what the options are. There may also be restrictions and fees, so be aware of those as well. You also must pay off and close any outstanding loans or lines of credit tied to the home.
Single-Purpose Reverse Mortgage
This is the kind of mortgage that is offered by provincial, local, and nonprofit agencies. Not only that but it is considered to be the least expensive process. The municipality or agency specifies the reason for this type of mortgage, and that will be its only use.
Homeowners can use the proceeds from this type of mortgage only to pay for a specific lender-approved item. The proceeds can cover property taxes or necessary repairs to the home. Whereas home-equity loan proceeds can be used for any purpose, the lender restricts how single-purpose proceeds can be used.
The difference here is that, with a home equity loan or line of credit, there is a monthly payment. With a single-purpose loan, there is no need for repayment until the home’s ownership changes, the borrower moves to a different residence, or passes away. It can also become due if the homeowners’ insurance on the property lapses or the city condemns the property.
The reason to go with his type of mortgage is that the homeowner can expect to pay far less in interest and fees. This differs greatly from a home equity conversion or proprietary reverse mortgage. While there is no need to make a payment until it is due, fees, interest, and mortgage insurance can reduce the amount that the homeowner can borrow.
Pros and Cons of a Reverse Mortgage
After all of that, you may still be wondering whether or not a reverse mortgage is the best idea. Like anything else in life, it comes with its own set of pros and cons involved. This makes it worth considering and looking further into.
This type of mortgage can be a very powerful source of income for older individuals. It can be for those who need to increase their retirement income or take on a big household project. Since the largest asset that most retirees have is their home – and it is likely paid off – this allows for an increase in income without increasing monthly payments. It is a great way for retirees to stay in their homes.
Not only that, but it can be highly beneficial because it requires no payment. That is until ownership of the home changes hand, the home is vacated or condemned, or the borrower passes away. It is the quickest and easiest path to substantially more income for a retired person who may not otherwise have that kind of access to additional funds.
Generally speaking, the interest rates tend to be much higher than most other types of mortgages out there. It is also worth considering that the equity in your home could go down. Combined with interest on your loan adding up, it could create quite the gap.
While you won’t need to repay the loan until you pass or sell the home, paying the loan and interest in full will fall on the shoulders of your estate. Not only that but it must be repaid within a specific period of time.
The general costs associated with this type of mortgage also tend to be much higher. While there is certainly greater flexibility in how you get and spend your money, it comes at a cost, literally.
Ultimately, it is up to you to determine if the benefits offset the higher cost and burden of repayment that falls on your estate. Getting the money from your loan, as well as what you can spend it on, is perhaps one of the most flexible mortgage options out there. This is especially true for seniors.
It also provides much-needed income for those retirees who may not have adequate funds for retirement. This shortfall can happen for a lot of reasons, and it is common for retirees to exceed their expected retirement life.
Weighing the pros and cons is essential regardless of the loan type. A reverse mortgage has all the potential to be beneficial to seniors in need of funds and provides greater flexibility for acquiring and spending that money.
Originally posted on the Dominion Lending Centres ‘Our House’ blog. The original post can be found here.