Rumors are that a reverse mortgage is only for people of a certain age – usually seniors. True or false?
Reverse Mortgage: American Style
For the most part, it’s true, particularly if you consider how they came about. In the United States, reverse mortgages have been around for some 20 years and they were created when the American Associated of Retired Persons lobbied the US Congress to come up with a financial product that would allow seniors to stay in their homes as long as possible. It took awhile for the product to catch the attention of the public. According to Cathy Jett who wrote an article for a Virginia newspaper, reverse mortgages have been gaining popularity only in the last three years.
At its most basic level, a reserve mortgage is a loan that a homeowner takes out on his house. American laws dictate that the homeowner must be 62 years and older, own his house and live there for majority of the time. When they apply for a reverse mortgage, the amount they receive will depend on their age, the interest rates in effect at the time of their application and the value of their house. The applicant has the choice of receiving the loan in one lump sum, in monthly instalments, in the form of a line of credit or as a combination of the first three options.
Unlike a regular or traditional mortgage, a reverse mortgage does not require the applicant to make monthly payments. The loan however must be paid in full once the applicant sells the house or no longer uses it as a principal residence. This makes owning your house longer a feasible alternative – you never run the risk of losing your home provided you pay the appropriate property taxes and insurance. A reverse mortgage resembles a traditional or regular mortgage only insofar as closing costs are concerned, including any fees that apply for servicing the loan and other such upfront costs.
Reverse Mortgage: Canadian Style
The principles that lie at the core of an American and Canadian reverse mortgage are the same. Like the US, this kind of financial product appeals to older Canadians. In cases where Canadian seniors get divorced – as an example – and there isn’t much by way of assets and hard cash, the house remains the most important asset of Canadians. During a divorce, the husband may get the money and the wife the house. Those who end up with the house are therefore house-rich but cash-poor.
For Canadian seniors who own a house that is fully paid or almost paid for, their piece of real estate can be an excellent source of additional income. They may want to travel, renovate or help a son or daughter still in university.
There was this one woman who applied for a reverse mortgage because she needed money. The bank gave her $50,000; she does not have to repay that amount for a certain number of years and for as long as she lives in the house.
A reverse mortgage therefore is ideal for seniors who have a house but have a low income, and need financial resources to continue living. Reports indicate that on the average, houses constitute 80% of Canadian seniors’ assets. If their income or pension is low, they don’t have the necessary cash required to meet their day-to-day. So with a reverse mortgage, seniors can avail of a lump sum amount with no obligation to pay it back for a certain number of years and as long as they remain in their homes.
A writer, P.J. Wade, says it’s a great way to have your home and money as well. A reverse mortgage enables an applicant to tap into the equity of his home for cash.
Some experts recommend not taking a reverse mortgage until you’re in your 60s. Applying for a reverse mortgage in your 50s means that you’re still young by the time the equity in your house is gone. This is the downside associated with reverse mortgages. The equity disappears after a certain number of years and the life of the loan ends, with the principal still outstanding and huge interests to boot!
There’s a match to this downside. When you have a reverse mortgage, and you’re unable to pay your debt, your house cannot be foreclosed even if the amount exceeds the value of your house.
Reverse Mortgage: Think of Alternatives
Before you apply for a reverse mortgage, gather at least two or three opinions. Your banker may offer alternatives. Many lenders agree that a reverse mortgage should only be regarded as a last resort. One alternative is a home equity line of credit, where you could have a source of cash by using your house as security. Another alternative is, if your children have left home and you have a spare bedroom or you don’t use your basement much, you may want to consider renting it out for added income.
Downsizing is another option. It used to be that your house was comfortable because the kids were growing up and had friends over, and you and your husband entertained a lot. If you don’t need your sprawling cottage anymore, and you can’t keep up with the maintenance, wouldn’t it be wiser to sell it in exchange for a smaller home?
To Reverse or Not to Reverse?
If you’re at a loss about choosing between a reverse mortgage and a cheaper alternative like a line of credit, test your feelings with these questions:
- Can you honestly say that you love your house and can’t bear to move to another place? Are you perfectly willing to do what needs to be done to keep it in tip top shape?
- Will you be able to sleep at night knowing that the money you acquired against your house via a reverse mortgage will eventually have to be paid in full and before accumulating debt eats up your equity?
- Are you in a position to pay the property taxes and insurance premiums as well as cough up amounts for repairs and improvements to your house? Remember that failure to pay taxes can oblige the lender to demand full repayment of the mortgage.
- Will you have sufficient resources to meet interest and principal payments on the reverse mortgage once they fall due?
- Finally, speak to some of your friends who have reverse mortgages. Find out what their experience has been. Are they glad they did it, or wished now they hadn’t?
Interrogate your lender if you must, no matter how repetitive your questions are. Your lender might just utter something that will raise your antennas higher or convince you that reverse mortgages are the way to go!