Reverse mortgage: it’s a term you may hear from time to time but may not have completely understood. Just what is a reverse mortgage? What does it do and do you qualify for one? More importantly, what is it used for? Let’s break down reverse mortgages so you get a better idea of what you’re looking at and to help you decide if it’s something you want to consider.
What is a reverse mortgage?
Think of it as a loan that lets you take out money from your principal residence’s equity without having to sell. (It’s sometimes referred to as “equity release”). The property can be a house, a townhouse or a condo – you just need to have enough equity built up to qualify.
Eligible homeowners can borrow up to 55 percent of the current value of their home. How much you can borrow will depend on your age, the appraised value of your home and who you choose to be your lender. If you have an existing mortgage, that must be paid off along with any other secured debt.
A reverse mortgage can be used in a number of circumstances. For example, you may need help covering healthcare expenses or you’re looking at upgrading your home with repairs or a renovation. You may even wish to use it to pay off some bills or outstanding debts.
What are the eligibility requirements?
To qualify, you must be the homeowner and be at least 55 years old. The home that you’re using to secure the equity release must be your primary residence which usually means that you live in the home for at least six months every year.
Eligibility criteria also includes listing the number of individuals named on your home’s title. These people must also be at least 55 years of age to qualify. Lenders will also consider other aspects as well like your home’s condition and appraised value.
How is it paid back?
You pay back your loan when you move out of your home, sell or the last borrower dies. This means you don’t need to make any payments on a reverse mortgage as long as you’re living in the house and until the loan is due.
Should you pass away before the loan is paid up, your estate will be required to repay the total amount left owing. The amount of time allowed to do this will vary, depending on the lender and other circumstances. If there is more than one person who owns the home, the reverse mortgage loan has to be repaid when the last borrower dies or if the house is sold.
One thing to keep in mind is that you’ll owe more interest on a reverse mortgage the longer you go without making payments. And, depending on market conditions, you may end up with less equity in your home at the end of your loan term.
Can you lose your home?
You are the owner of the home that carries the reverse mortgage and you can stay in it as long as you are able. You will not be asked to move or sell. You must, however, keep up with property taxes and home insurance while also ensuring that the property – inside and out – is well maintained.
What happens if you default on the loan?
Defaulting on a reverse mortgage loan typically occurs when:
- There are inconsistencies or attempts to conceal information during the application process;
- Homeowners purposefully allow a home to fall into such a state of disrepair that it affects the market value;
- The money from the reverse mortgage loan is used for illegal purposes;
- Homeowners are not adhering to the terms and conditions that have been laid out in the contract.
Since each reverse mortgage lender usually has their own definition of “defaulting,” it’s a good idea to ask them for specifics when applying.
Isn’t a reverse mortgage a “loan of last resort”?
Not at all. In fact, many financial professionals now recommend a reverse mortgage to supplement monthly income instead of forcing someone to sell or downsize or take out a larger mortgage or line of credit.
Besides not having to make regular loan payments, other benefits associated with reverse mortgages include not paying tax on the money that’s being borrowed, and no effects on any income benefits you may be entitled to such as Old-Age Security (OAS) or Guaranteed Income Supplement (GIS).
While there are one-time fees incurred during the arrangement process – appraisal fee, legal fees and bank fees to cover administration, title insurance and registration – these fees are typically paid off with the loan funds.
Is a reverse mortgage for you?
To find out if a reverse mortgage might be of benefit to you (and your spouse), start by sitting down with a lender to get more information. Learn about the application process as well as the fees, interest rates, conditions and other specifics.
Ingram Mortgage Group
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