Reverse mortgages are generally for individuals who are 55 years of age and older and have equity available in their home to borrow from. Hence, the reverse mortgage is secured by the available equity in the home which has been attained from paying down the mortgage over a period of time. This product allows for homeowners to borrow money and obtain liquid funds without having to move or sell their home.
In contrast to a regular mortgage, there are no regular payments or lump sum payments made on a reverse mortgage, until one sells their house or their home is no longer the principal residence. In the event one is deceased, moves or sells their home, arrangements must then be made to repay the loan and all interest accumulated on the loan. Also, keep in mind as interest accumulates on this loan, the equity in one’s home decreases over time. It is prudent, and in some cases mandatory to seek out Independent Legal advice (ILA) before being approved for a reverse mortgage.
Certain jurisdictions limit the loan amount to 55% of the current value of the individual’ home with a requirement that one pays off all debts secured by their home with the proceeds of the loan.
What are the benefits of a reverse mortgage?
- The money one borrows is considered to be a tax-free source of income.
- The individual also retains full ownership of their home.
- The individual will not be required to make any regular loan payments, when they decide to cash out some of the equity built into their home.
- There is a choice of how one receives the money, either via a lump sum payment, installments that will facilitate an income schedule or a combination of the two.
- An important consideration, and one to verify through a legal professional, is that this payment will not affect the individual’s Social Security payments in any manner.
Disadvantages of a reverse mortgage
- A reverse mortgage is usually accompanied by a higher interest rate than other types of mortgages.
- In addition to a higher rate, additional fees may be applicable, such as but not limited to: an appraisal fee, independent legal advice fees and an application fee.
- The equity in the home will be depleted over the years, as the interest charges accumulate on top of the principal amount one had borrowed.
- This may result in a lower value of the individual’s estate to leave for their heirs in the event one intends to pass on the value of the home to the heirs upon death.
- There are prepayment penalties applicable, if one sells their house prematurely based on the lender’s criteria and in the event of death, the loan and interest accumulated may be required to be paid back at a time sooner than it takes to settle one’s estate. This could result in a nightmare scenario for those responsible for settling the estate after the individual’s passing.
It would be prudent to take the advice of a legal professional once a decision has been made to consider this type of mortgage and further exploration of other alternatives to this product. An individual may also consider acquiring a home equity line of credit (HELOC) secured by the home, which may have interest only payments owed as a minimum. Another option, could be downsizing and using the proceeds of the sale to buy a smaller residence, hence leaving the primary residence “free and clear” for estate purposes. Key questions to explore with respect to this process will be:
What fees are applicable in the set up of this product?
In many cases, unbeknownst to the individual, when applying for a reverse mortgage a charge for services provided may be applied once the loan is financed. Its important to ask about what the fees may be prior to signing and accepting the terms of any document.
Is there a minimum time frame that one needs to be in this product, and if so, what are the penalties if I exit out of the program earlier?
It is important to have the minimum criteria of this product in your possession and understood in regards to what limitations may be present with a reverse mortgage. What would be your cost in the event you had to prematurely break the contract?
What occurs in the event the amount of the loan plus interest is higher than the fair market value of the home when it comes time to pay back the loan?
This will be of interest to individuals who have property that may depreciate or due to unforeseen circumstances own a property that may for whatever reason be deemed as not appreciating with the market. This could result in problems that you would want to explore prior to them occurring.
At the time of my passing, how long does my estate have; time-wise, to fully repay the loan back, and what are the implications if the executors of my estate surpass the stated deadline?
Another question to ask, to ensure your estate is protected and that your heirs and benefactors do not encounter any unforeseen delays and penalties if the above does occur.
As always, for all of your mortgage refinancing needs, second mortgages and new mortgages, contact your dedicated mortgage agent at the number listed below.