TORONTO, November 23, 2021 (Newswire.com) - A reverse mortgage is a type of loan for property owners who are at least 55 years old. With a reverse mortgage, the property owner can use their home equity to borrow cash either as a lump sum or in installments.
The best part is there are no monthly payments. Instead, the loan and interest are paid off when the borrow moves, the property is sold or when the owner passes away.
For those interested in a reverse mortgage, it's important to understand the pros and cons of this type of loan, so you can make the best decision for your family and financial needs.
What is a reverse mortgage?
A reverse mortgage is a popular loan for homeowners of retirement age. By tapping into their home equity, a borrower can choose to receive money as a lump sum or in monthly installments. The interest accrued is rolled into the mortgage balance, so the amount owed will increase, but it doesn't have to be paid until the home is sold or the owner moves.
In order to qualify for a reverse mortgage, a property owner must:
- Be at least 55 years old
- Use their home as their primary residence
- Have already paid off a large part of their mortgage
- Continue to pay property taxes and insurance fees
- The location of the home
The pros of reverse mortgages
Reverse mortgages can provide many benefits for property owners, including:
Funding your retirement
Reverse mortgages can help retirees set up a stable source of income and cover their living expenses. Especially for people with a good chunk of equity in their home but not a lot of liquid capital or savings, they can use a reverse mortgage to turn that equity into accessible tax-free cash.
Keeping your home
Retirees don't always have to sell their home and downsize to a more affordable space. With a reverse mortgage, they can keep their property and stay where they've already grown comfortable and put down roots.
Access to tax-free proceeds
Reverse mortgages are tax free, so you can keep 100% of the money you get from this loan. A reverse mortgage also won't affect your other benefits from Old-Age Security (OAS) and Guaranteed Income Supplement (GIS) programs.
The cons of reverse mortgages
It's also important to consider the risks of reverse mortgages, such as:
Additional costs at closing
While reverse mortgage borrowers don't have to make monthly payments, they do have to pay for other application and closing costs. These include appraisal fees, fees for independent legal advice, and administration or brokerage fees.
Higher interest rates
If you take out a reverse mortgage, you may have to pay a higher amount of money in interest rates. The interest rates for reverse mortgages are slightly higher than they are for traditional mortgages or Home Equity Lines of Credit (HELOCs).
If you partially or fully pay off your reverse mortgage early, you may face prepayment charges to the lender, depending on your contract.
Should you get a reverse mortgage?
Reverse mortgages can be helpful for certain homeowners who are over 55 and want access up to 55% of the cash value of their home while still living in and owning it. If you know you have a lot of equity in your home and you plan to continue living in that home, a reverse mortgage might be right for you. Just be sure you can cover any upfront fees or ongoing maintenance costs of your home.
Weighing the pros and cons — and obtaining independent legal advice — can guide you towards making the right choice for your home and living your best retirement.
Source: HomeEquity Bank