A reverse mortgage, is it worth it? It is an interesting question. Reverse mortgages are definitely on the rise. There are now many commercials airing on TV stating the merits of getting one. But what is a reverse mortgage? Who is eligible? What are the pros and cons? Is it worth it?
What is a Reverse Mortgage?
Here’s a definition from the government of Canada website, “A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. You may be able to borrow up to a certain percentage of the current value of your home. The maximum amount you will be able to borrow will depend on your age, your home’s appraised value and your lender.
You don’t need to make any payments on a reverse mortgage until the loan is due. This is usually when you move out of your home, sell it or the last borrower dies. You will owe more interest on a reverse mortgage the longer you go without making payments. This may result in you having less equity in your home.”
Who is Eligible?
The government of Canada website says that you have to be at least 55 years old, a homeowner, it has to be your primary residence. Also, if you have a mortgage or lien on your home, you have to pay it off when you get a reverse mortgage.
What are the Pros and Cons?
Here’s some details from Government of Canada website:
Pros
- You don’t have to make any regular loan payments
- A person may turn some of the value of your home into cash, without having to sell it
- You don’t have to pay tax on the money you borrow
- This money does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting
- You still own your home
- You may have options as to when and how you receive the money
Cons
- Interest rates are higher than most other types of mortgages
- The equity you hold in your home may go down as the interest on your loan adds up throughout the years
- Your estate will have to repay the loan and interest in full within a set period of time when you die
- The time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage
- There may be less money in your estate to leave to your children or other beneficiaries
- Costs associated with a reverse mortgage may be higher than a regular mortgage or other lending products
Some Caution about Reverse Mortgages
As mentioned above, a reverse mortgage is a loan and with a loan there are conditions that have to be meant and this is where caution is needed. For example you required to keep up the value of the home by maintaining it. However, as you get older this could be harder to do and if your place fall into disrepair you could default on your loan and potentially lose your home. A similar scenario can happen if you do not pay your property taxes and home insurance.
Is it Worth it?
It depends. If you plan to stay in your home right up until you die and you have no beneficiaries to your estate then the reverse mortgage might be to your liking. But if you have beneficiaries you want to give money to after you die, or you plan to downsize or go into assisted living, then it might not be for you. So do your due diligence and do your research. Because a reverse mortgage is not free money but a loan that has conditions like other loans. So you need to be mindful.