What is a Reverse Mortgage?
A reverse mortgage is a loan that is designed for home-owners 55 years of age and older (if you have a spouse, the age qualification applies to both of you). A reverse mortgage is secured by the equity in the home, which is the portion of the home’s value that is debt-free. It allows home-owners to obtain cash, without having to sell their home. Not all lenders offer reverse mortgages.
How does it work?
Unlike an ordinary mortgage, you don’t have to make any regular or lump sum payments on a reverse mortgage. Instead, the interest on your reverse mortgage accumulates, and the equity that you have in your home decreases with time. If you sell your house or your home is no longer your principal residence, you must repay the loan and any interest that has accumulated.
The loan amount can be up to 55 percent of the current value of your house. However, you must pay off any outstanding loans that are secured by your home with the funds you receive from your reverse mortgage.
Advantages of a Reverse Mortgage
- You don’t have to make any regular payments on the loan.
- You can turn some of the value of your home into cash, without having to sell it.
- The money you borrow is a tax-free source of income.
- This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be receiving.
- You maintain ownership of your home.
- You can decide how you want to receive the money. You can choose to receive:
- – a lump-sum payment
- – a loan to set up planned advances that provide you with a regular income, or
- – a combination of these options.
Disadvantages of a reverse mortgage
- Reverse mortgages are subject to higher interest rates than most other types of mortgages, however, the rates are competitive
- The equity you hold in your home will decrease as the interest on your reverse mortgage accumulates over the years.
- At your death, your estate will have to repay the loan and interest in full within a limited time. The time required to settle an estate can often exceed the time allowed to repay a reverse mortgage. For full details, check with the reverse mortgage lender.
- Since the principal and interest will be repaid to the lender at your death, there will be less money in your estate to leave to your children or other heirs.
- The costs associated with a reverse mortgage are usually quite high. They can include:
- – a higher interest rate than for a traditional mortgage or line of credit
- – a home appraisal fee, application fee or closing fee
- – a repayment penalty for selling your house or moving out within three years of obtaining a reverse mortgage
- – fees for independent legal advice.
What if the home goes down in value?
Repayment of the Reverse Mortgage is guaranteed not to exceed the fair market value of the home at the time it is sold. In the event that the fair market selling price of the home is not enough to repay the Reverse Mortgage in full, the repayment is limited to the amount received from the sale of the home. No other assets in the estate will be touched. If the proceeds from the sale of the home exceed the balance on the loan, the estate retains the surplus.
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