Reverse Mortgages

Anyone who has ever purchased a home is likely pretty knowledgeable about the mortgage process. But how many of us are familiar with the reverse mortgage?

Quite simply, a reverse mortgage is designed for home or condo owners 60 years of age and older who want to be able to access some of the equity in their properties without the demands of making monthly payments on a loan or line of credit.

A reverse mortgage can provide you with up to 40% of your homes appraised value, to be paid out in a lump sum, as needed, or by monthly, quarterly, semi-annual, or annual payments.

This influx of funds can provide the freedom to pay off debts, complete major home renovation projects, travel to dream destinations, purchase investment or recreational property, or supplement your retirement income.

And with that freedom also comes the knowledge that not one cent ever needs to be repaid until the home is sold.

So, what’s the catch?

Well, it depends on how you look at it.

While you maintain full ownership in your property, a reverse mortgage is registered on your title and must be repaid when you sell your home. Interest rates on reverse mortgages are higher than traditional mortgages or lines of credit, and because the interest accrues and is added to the balance, the amount of the mortgage gradually rises. Eventually you will end up with less equity for your estate or to pay expenses. If you look at it from the lender’s point of view, they are waiting for an unspecified period of time for repayment (as opposed to a traditional mortgage with regular monthly payments on the principal and interest) and the trade-off is higher interest rates.

Because property values will likely increase over the years and the loan is guaranteed to never exceed the fair market value of your home, most homeowners who take advantage of the reverse mortgage will usually have money left over once the property is sold and the loan is repaid.

The money obtained from a reverse mortgage is tax-free, won’t affect any type of government benefits you might already be receiving, and if you decide to invest some or all of the proceeds you might be able to deduct the interest against your income at tax time.

Some costs that the homeowner will have to incur in order to obtain a reverse mortgage include a home appraisal (around $200-$400), legal fees, and administration costs.Remember, a reverse mortgage is not for everyone. No one has an unlimited amount of equity built up – a reverse mortgage doesn’t change that fact.

As with any major financial transaction, it is advisable to get qualified independent advice you can trust before signing on the dotted line.

By Jacqueline Sharon