Rumors suggest that a reverse mortgage is only for people of a certain age—usually seniors. Is this true or false?
Reverse Mortgage: American Style
For the most part, it’s true, especially when you consider the origin of reverse mortgages. In the United States, these loans have been around for about 20 years. They were created after the American Association of Retired Persons (AARP) lobbied Congress to develop a financial product that would allow seniors to remain in their homes as long as possible. It took some time for the public to catch on. According to Cathy Jett, who wrote an article for a Virginia newspaper, reverse mortgages have only gained significant popularity in the last three years.
At its core, a reverse mortgage is a loan that a homeowner takes out on their house. U.S. laws state that the homeowner must be 62 years old or older, own their home, and live in it for the majority of the time. When applying for a reverse mortgage, the amount received depends on the homeowner’s age, current interest rates, and the value of the house. The applicant can choose to receive the loan in a lump sum, in monthly installments, as a line of credit, or a combination of these options.
Unlike a traditional mortgage, a reverse mortgage does not require monthly payments. However, the loan must be repaid in full once the applicant sells the home or no longer uses it as their primary residence. This makes owning your home longer a viable option—you will never run the risk of losing your house, provided you continue to pay the necessary property taxes and insurance. A reverse mortgage resembles a traditional mortgage only in terms of closing costs, including fees for servicing the loan and other upfront charges.
Canadian Style
The core principles of reverse mortgages in both the U.S. and Canada are the same. In Canada, this type of financial product also appeals to older citizens. For example, if Canadian seniors divorce and have little cash or other assets, their home often remains their most valuable possession. In many cases, the husband might receive the money, and the wife keeps the house. Those who end up with the house are often “house-rich but cash-poor.”
For Canadian seniors who own their homes outright or nearly so, their real estate can be an excellent source of additional income. This income might be needed for travel, renovations, or to help a child still in university.
One woman applied for a reverse mortgage because she needed funds. The bank gave her $50,000, which she does not need to repay for a set number of years and only as long as she lives in the house.
A reverse mortgage is therefore ideal for seniors with a home but limited income, needing financial resources to continue living. Reports indicate that, on average, homes represent 80% of Canadian seniors’ assets. If their income or pension is low, they may lack the necessary funds for day-to-day living. With a reverse mortgage, seniors can access a lump sum with no obligation to repay it for several years and only if they remain in their homes.
Writer P.J. Wade says that a reverse mortgage is a great way to keep both your home and some money in hand. It allows an applicant to tap into the equity of their home for cash.
Some experts recommend waiting until your 60s to apply for a reverse mortgage. Applying in your 50s could mean you’re still relatively young when the equity in your house starts to diminish. This is the downside of reverse mortgages—the equity disappears after a certain period, and the loan’s principal remains, accumulating interest.
However, there’s an upside to this downside: When you have a reverse mortgage and can’t pay your debt, your house cannot be foreclosed, even if the debt exceeds the house’s value.
Consider Alternatives
Before applying for a reverse mortgage, seek at least two or three opinions. Your banker may offer alternatives. Many lenders agree that a reverse mortgage should be considered a last resort. Some alternatives include a home equity line of credit, where you can access cash using your house as collateral. Another option is renting out a spare room or basement if your children have left home and you don’t use that space much.
Downsizing is another alternative. Perhaps your large house was comfortable when your kids were growing up and had friends over, and when you and your spouse entertained often. But if you no longer need the extra space and can’t keep up with the maintenance, it may be wiser to sell the property and buy a smaller home.
To Reverse or Not to Reverse?
If you’re unsure about whether to choose a reverse mortgage or opt for a more affordable alternative, like a line of credit, consider these questions:
- Can you honestly say that you love your house and can’t bear the thought of moving? Are you willing to put in the effort to keep it in top condition?
- Will you be able to sleep at night knowing that the money you’ve obtained through a reverse mortgage will eventually have to be repaid before the accumulating debt erodes your equity?
- Are you in a position to pay property taxes, insurance premiums, and for repairs or improvements? Failure to pay taxes could force the lender to demand full repayment of the mortgage.
- Will you have enough resources to meet interest and principal payments on the reverse mortgage when they become due?
- Finally, talk to some of your friends who have reverse mortgages. Find out if they’re happy with their decision or if they now regret it.
Don’t hesitate to ask your lender any questions, no matter how repetitive. Sometimes, a question might prompt an answer that raises your concerns or convinces you that a reverse mortgage is the right choice for you!