Reverse Mortgages

Reverse mortgages are loans made to individuals who own a home or a condominium outright and who are 55 years of age or older. If the borrower is married, the age requirement applies to both spouses. The loan allows homeowners to turn the equity in their home into cash.

Typically, individuals can receive up to 50% of the market value of their home from a reverse mortgage, depending on such factors as age, marital status, location of the home, the type of home, and the appraised value of the home. Interest rates are also an important factor in determining how much equity can be accessed, because the higher the rate, the less that can be borrowed.

The home continues to be owned by the homeowner. The cash derived from the reverse mortgage can be paid as a lump sum, in regular monthly payments, or on an “as-needed” basis similar to a line of credit.

Interest is charged on the loan at a higher rate than for most other types of mortgages. Unlike regular mortgages, individuals are not required to make any regular mortgage payments or interest payments as long as they continue to live in the home. Interest on the loan accumulates while the equity in the home decreases. The higher the interest rate, the faster debt builds.

Once the home is sold or if it is no longer is the principal residence, the loan and interest must then be repaid. This includes repayment of the mortgage principal and interest by the estate of the homeowner when the homeowner dies. If the home is worth more than the amount of the reverse mortgage, the extra money goes to the homeowner (if still living) or to his or her estate (if the homeowner has died). If the home is worth less than the amount owed, the provider of the reverse mortgage takes the loss. This is part of the reason the total loan amount is a maximum of only 50%. It is unlikely a property would decrease by 50% of its value while the reverse mortgage is in effect.

Some of the advantages of a reverse mortgage include:

  • The funds borrowed are tax-free
  • The income received will not affect Old Age Security (OAS) payments received and therefore will not contribute to full or partial OAS claw backs.
  • Cash flow can be increased by the equity taken
  • Individuals can continue to live in their home
  • Unlike regular mortgages, individuals are not required to make any regular mortgage payments or interest payments as long as they continue to live in the home.

 Some of the disadvantages of a reverse mortgage include:

  • The equity in your home will decrease over time, and interest will accumulate
  • Interest rates on a reverse mortgage are higher than for lines of credit or traditional types of mortgages
  • Application fees, closing fees, and appraisal fees can be high
  • Legal costs are incurred to set up the reverse mortgage
  • An individual who sells a home or when it is no longer a principal residence within three years of obtaining the reverse mortgage will have to pay a penalty to wind up the mortgage.

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April 27, 2017

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