Reverse mortgages Advantages and disadvantages

A reverse mortgage is a loan secured by your home that allows you to receive up to 55% of the home’s value (excluding the cost of accrued interest). The older you are and the greater the value of your home, the larger the amount you could receive. You (and your spouse, if you have one) must be 55 or over.

Unlike a traditional mortgage or a line of credit, you don’t have to repay a portion of the loan or interest at regular intervals (e.g., monthly). Usually, you repay a reverse mortgage in a single payment when you:

  • Move out;
  • Sell your home;
  • Die (or when you and your spouse die).

Here is an example of how a reverse mortgage can be used:

Jacqueline and Pierre have been retired for a few years now and would like to finance new plans, like travelling, but they don’t have enough money. To get the funds required, they could sell the home they’ve lived in for 40 years, but they still want to live there. With a reverse mortgage, they could continue to own their home, live in it and get the money they need for their plans. They would not have to repay the borrowed amount and the accrued interest until they sold the home.

They could also take out a home equity line of credit, instead, and either repay the loan over time or just pay the interest each month. They’re looking for the best option.

What are the advantages of a reverse mortgage?

  • You continue to own your home. The lender can’t ask you to sell or vacate it in order to repay the loan. You must, however, continue to pay the property taxes, maintenance costs and insurance.
  • You can use the borrowed amount to maintain your lifestyle by, for example, paying yourself an annuity.
  • The lender will not require any payments from you while you are living in your home. You may, however, repay some or all of the interest every year.
  • As long as you comply with your mortgage obligations, including paying your municipal taxes and insurance, the lender will usually guarantee that you’ll never have to pay back more than the value of your property.

You won’t pay taxes on the amount you receive as a loan

Whether you borrow money through a reverse mortgage, a home equity line of credit or another type of loan, the amounts received are not taxable, because they’re a loan, not income.

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What are the disadvantages of a reverse mortgage?

  • The interest rate on a reverse mortgage is usually higher than on a home equity line of credit. Be sure to compare solutions.
  • Interest rates may increase or decrease over time.
  • Since you aren’t required to repay the loan before the maturity date, interest keeps accruing and can end up being a significant cost. That’s because interest is compounded, meaning you pay interest on the interest. As a simple example, if you borrow $50,000 through a reverse mortgage at an annual interest rate of 4.5%, then sell your home 10 years later, how much will it cost to repay the $50,000 loan plus the accrued interest? $77,648. If you wait another 10 years, it will cost $120,586.
  • A reverse mortgage isn’t the best solution if you want to leave the value of your property as an inheritance. Your debt accumulates and may grow to equal the value of your home.

Before choosing a reverse mortgage, take the time to review the advantages and disadvantages, then shop around

  • Do you absolutely want to hold on to your home?
  • Instead of a reverse mortgage, could you obtain a home equity line of credit at a lower cost?
  • With a reverse mortgage, how much will you have to repay if the value of your debt, including interest, exceeds the value of your property?
  • Compare the qualification criteria, interest rates, file opening fees and early repayment (prepayment) penalties of the various firms offering reverse mortgages.

Repaying the loan

Although your home may gain value and help offset the interest costs, it may also lose value or require major repairs. So, be careful in your calculations and projections.

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