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Reverse Mortgage

Canadian-reverse-mortgage_thumb[2] A reverse mortgage is a mortgage designed to provide income to seniors with home equity.

Unlike a traditional mortgage, a reverse mortgage does not require a set payment schedule. You can make monthly interest payments if you choose, but most people opt to pay back the mortgage when they sell their home.

Once you get a reverse mortgage, even if you never make a single payment, the lender cannot take your home. Moreover, you’ll never owe more than your home is worth, even if it depreciates.

Since a reverse mortgage is a loan, the money you receive is tax-free and doesn’t affect other retirement benefits.

Here are some basic reverse mortgage guidelines:

  • You must be 55 or older and own an eligible home or condo
  • Depending on your age and the property, you may qualify for up to 50% of the value of your home.

Sample uses of reverse mortgages:

  • Supplementing retirement income
  • Helping grandchildren with educational expenses
  • Home renovations
  • Eliminating existing debts to improve monthly cash flow
  • Personal use (travel, recreation, etc.)
  • Purchase of investment or recreational properties

Costs for setting up a reverse mortgage include appraisal, legal, and lender fees.  Budget on $2,300, give or take.

Increasingly, people are using reverse mortgages to purchase income-producing investments. This is typically done to supplement their retirement income and generate a tax deduction.

It should also be noted that a line of credit (LOC) is often a cheaper alternative than a reverse mortgage. The problem is, some people don’t qualify for a LOC due to insufficient income, non-employment, credit issues, debt ratios, etc. Moreover, a LOC requires monthly payments whereas a reverse mortgage does not.

Some lenders let you qualify for a LOC based primarily on the equity in your home. This option is not without risk, however:

  • Seniors have been known to tap out their LOCs and get into a position where they have no more capacity to borrow. The worst case would be borrowing over 40-50% of your equity, not being able to make payments, not being able to refinance, and losing your house.
  • Banks can shut off the tap at any time due to missed payments (even if accidental), a deceased spouse, or years of steadily growing debt with no principal reduction.
  • Banks can also reduce your available borrowing limit or raise your interest rate

Other alternatives to a reverse mortgage include:

  • Selling your home and downsizing, renting or moving in with family
  • Selling other investments or real estate
  • Cashing in on an uneeded life insurance policy
  • Government assistance for low-income seniors
  • Borrowing from another, with your property used as collateral
  • Getting a roommate or renter to offset some of your home costs
  • Property tax deferral (available in some locations)

People get reverse mortgages because they want to remain in their homes, can’t make payments, are under/unemployed with minimal cash flow, and have no better solutions. Yes, reverse mortgages can eat up your equity, but this accelerated equity loss is a secondary concern for people with these challenges.

Some people even get reverse mortgages because they think home prices will fall (even if they don’t plan to borrow the money right away). This, in effect, locks in the amount of equity at your disposal. Keep in mind, you don’t have to take all the proceeds at once. You can withdraw (borrow) smaller amounts when you need it to minimize interest.