Financing your home is probably one of the least fun aspects of home ownership. Nevertheless, it’s essential. And when it comes to a reverse mortgage, things get a little more interesting. With a reverse mortgage, you can take advantage of the value of your home without selling it. Sounds pretty good, doesn’t it? Before you call your bank, here are all the facts about how reverse mortgages work.
What is a Reverse Mortgage?
Reverse mortgages are also referred to as equity release. They allow you to borrow a percentage of the current value of your home. This percentage is based on a number of things including your age, the appraised value of your home, and your lender. Basically, the older you are and the longer you’ve had your home, the more equity you will have in your home. As well, current market trends will also contribute to the amount of money you can access.
How is a Reverse Mortgage Paid Off?
One of the things that appeal to homeowners is that payments on reverse mortgages are not required until the loan is due. The loan is usually due at the time of death or when you sell your home. One thing to consider is that the longer you go without payments toward a reverse mortgage, the more interest you will owe. That is very important because this can negatively affect the equity in your home, meaning when you decide to sell, you might not end up with as much profit as you were expecting.
Is Everyone Eligible for a Reverse Mortgage?
Not everybody is eligible for a reverse mortgage. In order to apply for a reverse mortgage, you must:
- Own your home, which must be your primary residence
- Be at least 55 years old if you are single
- Both be at least 55 years old if you own the home with a partner/spouse
- Both be on the mortgage application if you own the home with a partner/spouse
- Pay off your mortgage once you receive a reverse mortgage
There are a number of things the lender will consider for reverse mortgage applicants including:
- Where you live
- The appraised value of your home
- The type of home
- The condition of your home
It is also not uncommon for a lender to ask you to speak to a lawyer. They want to ensure you know the answer to the question, “What is a reverse mortgage?”
Reverse mortgage lenders in Canada include:
- HomeEquity Bank, which offers the Canadian Home Income Plan (CHIP) available across Canada.
- Equitable Bank, which offers the PATH Home Plan through mortgage brokers in Alberta, British Columbia, and Ontario.
Once you qualify for a reverse mortgage, you are required to pay off your mortgage as well as close outstanding loans or lines of credit that are secured by your home, which includes your mortgage as well as a home equity line of credit. That might sound scary, but you use the money from your reverse mortgage to pay everything off. The balance of your reverse mortgage can then be used for whatever you like.
The money can be accessed in the following ways:
- A one-time lump sum
- Taking an amount up front and then receiving the rest in installments
Are There Fees or Restrictions with a Reverse Mortgage?
Before you decide how you want to access your money, discuss your options with your lender. There could be fees and restrictions in some cases. For example, in most cases, you will not be able to use your home to secure another loan or apply for a home equity line of credit. Also if you decide to pay off your reverse mortgage early, there might be a fee.
Other fees and costs can include:
- A high interest rate
- Home appraisal fee
- Setup fee
- Legal fees
How is the Money Repaid with a Reverse Mortgage?
Reverse mortgages do not have regular payments. However, interest will be charged to the original loan amount until your loan is paid in full. Interest will continue to increase the loan amount over time, which is very important to keep in mind. When you sell your home, or you no longer use your home as your primary residence, you will be expected to pay the entire amount owing.
You do have the option to make payments towards the principal and interest at any time. As mentioned, if you choose to pay in full, there is usually a fee. If you default on the loan, you will be expected to repay the amount in full. Defaults could include:
- Using the money for something illegal
- Lying on your application
- Allowing the value of your home to decrease due to negligence
- Not adhering to the conditions of your reverse mortgage
Upon the sale of your home or death, the entire amount will have to be paid off. The time allowed for the complete repayment will vary. For example, your estate might have 180 days to repay while if you were to move from your home, you might have as long as a year.
Pros and Cons of a Reverse Mortgage
Before you approach a lender, consider the pros and cons of a reverse mortgage.
- No regular loan payments
- You can live in the home
- Don’t have to sell your home
- Your loan is tax-free
- No effect on Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
- Options on how you receive the money
- High interest rates
- Building interest can reduce the equity in your home
- Your estate will have to repay the loan and interest in full when you die
- Estate settlement time could be longer than the time given to repay
- Less money to leave to your children and beneficiaries
- Higher costs than a regular mortgage or other loan options
If you do decide to meet with a broker or lender, ask these questions:
- How do I access my money?
- What are the fees and penalties?
- What is the interest rate?
- Are there time restrictions on when I can sell my home?
- How long does my estate have to pay off the balance?
- What if the amount of the loan is higher than my home’s value when the loan is due?
So now you know the answer to the question: “What is a reverse mortgage?” Keep in mind there are other ways to access the equity in your home. Always be certain you have the full story and understand the pros and cons of a reverse mortgage before you proceed.