Reverse Mortgage Puts Your Equity To Work For You

What is a Reverse Mortgage?

This is a loan that allows homeowners to get money from their home equity without having to sell their homes. You may have heard the term “equity release”; this is another term that is used to describe a reverse mortgage. 

The program allows you to borrow up to 55% of the current value of your home, but the home must be fully paid off. There are certain criteria that affect the size of the loan that the lending institution will extend to you.

The maximum amount you’re able to borrow will depend on your:

  • Age
  • Home’s Appraised Value
  • Lender

A reverse mortgage is available to homeowners 55 years or older with high-value homes, and it allows them to get a lot more cash out of the equity in their home. This gives retired homeowners added income by giving them access to the unencumbered value of their properties.  

Unlike a traditional mortgage, you no longer have to make monthly mortgage payments, you get the monthly payment to use any way you would like. Essentially, you’re turning your home’s equity into cash that you can use to improve your lifestyle. 

You can pay the closing costs and other lender’s fees with the cash you receive and you get to keep the title to your home. You must live in the home and continue to be responsible for property taxes, insurance, and maintenance of the property. 

This type of mortgage has not been around forever and when they first came on the market they had extremely high-interest rates so they were not very popular. However, eventually, they became more popular and the interest rates have reduced, so more people with high-value homes thought that this type of mortgage was something they might like to explore. 

A reverse mortgage is more suitable when the property value is appreciating because a depreciating property could result in a loss rather than a gain. And this is even more compounded if economic conditions cause a significant drop in interest rate after your reverse mortgage contract commenced. 

During 2008 to 2009 when the housing bubble burst in the United States, and basically the bottom fell out of the market, more and more people began losing their homes than could take out this type of loan. Interest rates were still higher than for a traditional loan and borrowers just could not see themselves clear to pay the interest on reverse mortgages. Hence, some homeowners lost much of the home equity that they once thought they had due to depreciating home costs. 

If you have this type of loan then the fact that your loan is secured by your home, if the housing values are still declining then doing the math will indicate that the amount of interest charged to you will effectively work out to be even higher than what it was when you signed the contract. You can ask for an interest reduction but chances are your bank may be laughing all the way to the bank and probably will not adjust their rate of interest. 

Why Do a Reverse Mortgage?

Many people see their homes as their greatest asset (Before I became financially literate, I too used to do the same), but they also see it as their greatest expense, so for this reason they invest a lot of their waking moments thinking about paying off their mortgage. Some may prefer to go hungry or live menially than miss a mortgage payment.  

But once the home is paid off the equity is useless — I call this “dead equity” — unless you have a way to access it to purchase some cash flow creating assets or other assets like portfolio funds or stocks that can be partially sold to have access to some extra cash immediately. 

Wouldn’t you prefer to have access to your hundreds of thousands of dollars in equity to improve your lifestyle now, than just continue to shoulder all the other non-mortgage expenses associated with your home? 

This is why a reverse mortgage may be a great strategy for you. But hold your horses…’there’s no one size fits all’ option when it comes to a reverse mortgage. So you have to look at your own situation to decide if it makes sense for you. Plus like everything else, there are advantages and disadvantages that you need to consider before making a decision. 

Advantages of a Reverse Mortgage

This type of mortgage is a great way for seniors to increase their retirement income and thus improve their lifestyle during their retirement years. 

It is especially beneficial for seniors who may not have children, grandchildren, and other family members who they might want to bequeath the proceeds of their property to when they become angels. But the benefits may be different for seniors who want to leave some wealth for the next generation.😁 

Some of the things that seniors could use the proceed from a reverse mortgage to do to reduce their financial obligations are:

  • Pay off existing debt
  • Pay medical and dental bills that are not covered by the government
  • Pay for therapies not covered by the government
  • Pay property taxes and insurance on time and in full (Paying in full reduces the premium)
  • Help fund children or grandchildren education
  • Start some retirement investments for the long haul.  

Being retired does not have to be synonymous with ‘ignoring investment opportunities.’ It’s never too late to start building more assets….especially cash flow creating ones!😁😁 

One key advantage of a reverse mortgage is that, upon death or the homeowner’s inability to continue living in the home for medical reasons, for instance, the reverse mortgage insurance will cover any shortfall in the loan when the home is sold to repay the mortgage. 

Disadvantages of a Reverse Mortgage 

A reverse mortgage usually attracts a higher interest rate than a traditional mortgage, so the amount of interest paid will be higher. 

Since a reverse mortgage requires that the homeowners live in the home, if the health of the homeowners deteriorate and they can no longer live in the home, that can become problematic. The home will have to be sold to pay off the loan on the reverse mortgage, even though funds are still required to pay for perhaps long-term care and other living expenses. 

If you want to leave your home to your children or family members to live in, having a reverse mortgage on the property could cause problems if the beneficiaries do not have the funds needed to pay off the loan. Since the homeowners who obtain reverse mortgages must also live in the house, upon death, the loan may be nullified and lenders may foreclose on the property. 

This could leave your loved ones on the street! 😱😱 

In addition, there are lots of upfront fees that are involved with a reverse mortgage so if the homeowner dies shortly after the loan is executed, the benefits will not likely be realized.

Some of the upfront costs are:

  • Lender Fees
  • Initial or Ongoing Mortgage Insurance Premiums
  • Closing Costs
  • Property Title Insurance
  • Home Appraisal Fees
  • Home Inspections Fees 

Since this type of loan does not have the same protection as a mortgage, you must be sure you can trust the bank or lender who holds the note on the loan. In Canada, two financial institutions offer reverse mortgages: Home Equity Bank that offers the Canadian Home Income Plan (CHIP) —  you can get a reverse mortgage directly Home Equity Bank or through mortgage brokers and Equitable Bank that offers a reverse mortgage in some major urban centres. 

Research the different lenders and then make an informed decision. Get everything in writing especially as to when you will receive your money and whether you will receive monthly payment or as one lump sum. 

If you are leery of the continuity of monthly payments then ask to receive your money as one lump sum. Getting a lump sum could help you to take advantage of investment opportunities. Do keep in mind however that when you take a lump sum, interest is due on the entire amount when taken, but if you take monthly payment, interest is due on only the amounts taken from the time it was taken. 

You have worked hard to get where you are and the last thing you need is to have a not-so-reputable financial institution come along and stick it to you. When you do your research, take notes, then you can ask pertinent questions and you will know without a doubt if the lender you choose knows the market and all the ins and outs, ups and downs. It only makes sense to work with someone who is an expert. 

The big takeaway here is that you shouldn’t just jump into a reverse mortgage because it sounds like a great idea, you have to do your homework. And even if you’re cash poor, if a reverse mortgage seems like trouble, run the other way!  

There are other options, such as selling your home and downsizing to a smaller and cheaper one. Plus although leasing is not favoured by some homeowners, renting may help to alleviate some of the homeownership headaches like property taxes and repairs.  

Other possibilities include seeking home equity loans, home equity line of credit (HELOC), or just refinancing to take out some equity and increase your mortgage. Just make sure your new mortgage payment is affordable if you do the latter.