How to Assess Whether a Reverse Mortgage is Right for You

iQuanti: For retirees looking to cover a large expense or increase their cash flow during retirement, a reverse mortgage is a viable option. But depending on how you plan to use the funds, will the amount you can get from a reverse mortgage be enough? Here's how to calculate how much you could get from a reverse mortgage, plus a few alternatives to consider.

How much can you borrow with a reverse mortgage? 

Ultimately, the amount you can borrow with a reverse mortgage comes down to three factors: age, the lender, and your home's appraised value. Given the right combination of factors, you could be eligible to borrow up to 55% of your home's current value.

  • Age: You must be 55 or older to be eligible for a reverse mortgage. If you're applying with a spouse, everyone on title must meet the age requirement. The higher your age, the more you will be qualified for. 
  • Lender: HomeEquity Bank offers a CHIP Reverse Mortgage, which allows qualifying Canadians to access up to 55% of the value of their home's appraised value in tax-free cash.
  • Your home's appraised value: For a CHIP Reverse Mortgage through HomeEquity Bank, you'll need a minimum home value of at least $200,000 and a minimum initial loan of $20,000 or $25,000, depending on the product type
  • Maximum reverse mortgage amount: HomeEquity Bank doesn't cite a maximum reverse mortgage loan amount, meaning they could be the preferred option for those with more expensive homes. However, properties valued at $2.5 million or great require additional approval.

Find out how much tax-free cash you qualify for with a free online calculator.

How much does a reverse mortgage cost? 

It's exciting to see how much money you could get with a reverse mortgage, but you also need to understand the associated costs and take into account the interest. With a reverse mortgage, you're taking out a loan, which means the traditional costs associated with a loan come into play. You may need to pay:

  • Closing and Administrative costs: HomeEquity Bank cites a base closing and administrative fee of $1,795, which may vary and doesn't include an appraisal or ILA. 
  • Appraisal costs: Home appraisals may cost anywhere from $300 to $500 or more, depending on your location. 
  • Independent Legal Advice (ILA) fees: Every homeowner who wants to take out a reverse mortgage must meet with an independent lawyer to review the agreement. The lawyer will also be an unbiased third party to ensure you haven't been pressured into signing. ILA fees can cost you several hundred dollars depending on the lawyer you choose. 

On the plus side, the closing and administrative costs as well as the ILA fees are paid from the proceeds of the mortgage, not up front. 

Is a reverse mortgage worth It? 

For homeowners in specific circumstances, a reverse mortgage can make sense. Just like any lending solution, it is important to make sure that a reverse mortgage will help you achieve your financial goals. The good news is lenders promise that you'll never owe more than the fair market value of your home. This way, the sale of your home will always cover the total cost of the reverse mortgage since they have a no negative equity guarantee. 

Source: iQuanti, Inc.

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Categories: Mortgages and Loans

Tags: loans, mortgage, reverse mortgage