Reverse mortgages are a popular way to access your home’s equity without having to sell your property. If you watch TV or listen to the radio, you have undoubtedly seen ads about these financial products. These ads promise that a reverse mortgage will help you consolidate your debt, pay for significant expenses, or fund your retirement dreams. For the most part, these advertisements are correct. A reverse mortgage can help you access your home’s equity quickly, easily, and tax-free. There are some caveats, however. To better understand reverse mortgages and what they can do for you, let’s take a look at what exactly it is.
What Is A Reverse Mortgage?
In short, a reverse mortgage lets you access your home’s equity while letting you live in the property. To apply for this type of loan, you must be:
- 55 years or older
- A homeowner
- Lien-free (this will be clarified later)
If you own your property jointly with your spouse, you can apply together for a reverse mortgage. You must both be 55 years or older to qualify .
Banks will not grant reverse mortgages on properties encumbered by other liens. You cannot have an existing mortgage or home equity line of credit on the property. However, you can use the funds obtained from this type of loan to pay off existing liens. For example, if you still owe $50,000 on your house and you received a reverse mortgage for $100,000, you could wipe out the $50k with that $100k balance. Naturally, this would leave you with only $50k in funds to use.
Being approved for a reverse mortgage means that you can access up to 55% of your home’s current equity . You still maintain control of your house. The money received is entirely tax-free.
How Is This Different From A HELOC?
You may be thinking that this sounds a lot like a HELOC, with a lower loan-to-value ratio (you can access 65% of your home’s value with a HELOC). There are a couple of crucial differences between the two products.
First, a reverse mortgage has no repayment requirements. Unlike a HELOC where you must pay at least the interest, a reverse mortgage has no payments. Once you get the money, it is effectively yours. You can use it all to buy a Ferrari if you want (although we wouldn’t necessarily recommend that) and not worry about making any monthly payments. Interest will accrue on the full balance of the reverse mortgage.
Second, a reverse mortgage’s balance becomes payable when you sell your home, or you pass away. If you choose to sell your home, then the balance is deducted from the sales price of the house. If you pass away, your estate must pay the balance of the loan. As the homeowner, you’ll enjoy access to your money as long as you’re living in your house. That 55% of your home’s value is yours to keep so long as the home is still your principal residence.
Sounds Great! Is There A Catch?
All of the above might sound like it is too good to be true. After all, it seems to be access to 55% of your home’s value with relatively few catches. For the average Toronto property, that could mean getting a windfall of $440,000 tax-free!
Like anything in life, there are a few catches with a reverse mortgage. Although compared with other financial offerings, these caveats are relatively minor.
First, the interest rate on a reverse mortgage tends to be a bit higher than a HELOC. Usually, it is not significantly higher than a home equity line of credit. At the time of this writing, the reverse mortgage rate is approximately 1% higher than a line of credit. While a reverse mortgage is technically a little pricier, the advantage of not needing to pay anything monthly may make up for that interest rate increase.
Second, reverse mortgages sometimes have prepayment penalties if you sell your home within a few years of obtaining the mortgage. Your lender defines these penalties. For people who know they will be in their home for quite a few years, this certainly isn’t a cause for concern. However, if you think you might be selling your home within 2-3 years, you may wish to reconsider getting a reverse mortgage.
How Would I Apply?
Now that we’ve discussed “What Is A Reverse Mortgage,” chances are you think what many other Canadians think. It is a powerful tool to consolidate debt and fund other retirement plans. It lets you have access to your home’s equity in an incredibly streamlined fashion. Reverse mortgages don’t have a lot of the red tape and other issues that come with other lending products.
If you would like to apply for a reverse mortgage, your best bet would be to talk to a mortgage broker. In Canada, two banks provide this type of loan. You can get it through HomeEquity Bank or Equitable Bank . Both banks service the Toronto market. While you can apply to HomeEquity Bank yourself, Equitable Bank works exclusively with mortgage brokers. Therefore if you want to compare rates and get the best deal, you will need to work with a mortgage broker.
Naturally, at Citadel Mortgages, we can work with both lenders to get you access to the money you deserve at the best rates. We’ve helped many clients get reverse mortgages. Our clients have used the money from their home’s equity to get rid of debt and pay for other significant expenses. Some of our clients have also used the money to pay for home repairs that are badly needed.
What Do I Need To Apply?
While your mortgage broker can walk you through the exact application steps and documentation, in general, you will need proof of:
- Your age and your spouse’s age (if applicable).
- Where you live
- Your home’s appraised value
With the last point, the lender will send someone out to assess the home. That appraisal will determine how much you can take out of your house. If your home’s value is $1,000,000, then you will have access to $550,000 in cash!
It is worth pointing out that there is no income verification. Of course, that is atypical of a loan product. Every other loan, from credit cards to home equity lines of credit, requires evidence that you can repay the loan. Recall that a reverse mortgage has no payment requirements. Payment is only due when you sell the property, or you pass away. Since no monthly payment is required, the bank does not have to check your income. The only aspect of your financial life they care about is how much your home is worth to determine how much money you can access.
Some lenders may require evidence that you have discussed obtaining a reverse mortgage with a lawyer. The reason for this is that it can have implications for your estate. If you and your spouse pass away, then the balance becomes due from the sale of the property. If you have children, they will receive the proceeds of the sale of the home, minus whatever you owed on the reverse mortgage. For some lenders, if the balance owed is higher than the value of the property, they won’t ask for the full amount. Sale of the property and 100% of the proceeds going to the mortgage will be sufficient. Put another way, if you own a $500,000 property, and the balance on the reverse mortgage is $600,000, your estate will only have to pay $500,000.
What Are My Obligations If I Get A Reverse Mortgage?
Without any monthly payments, you may be wondering if there is anything you would need to do once you got a reverse mortgage. Put more precisely, would there be any way that you could default on this type of loan?
Yes, it is possible to be in default. With that said, it is undoubtedly much harder to find yourself in a difficult situation with a reverse mortgage than a traditional home equity line of credit.
The easiest way to be in default is to allow your home to become in a state of disrepair. Remember that full payment is required when you sell your home or when you pass away. Therefore the bank has a very keen interest in ensuring that your house remains in pristine condition at all times. You don’t need to worry about getting every little paint chip fixed. However, if you elect not to repair something that could severely impact your home’s value, that could put you in default.
An excellent example of this would be failing to repair a significant crack in the foundation. Or if the ceiling leaked and you were unable to repair the water damage, that would be another example. Both of these events could have catastrophic consequences on the overall value of your home. Anything that you elect not to fix that could severely impact your or your estate’s ability to sell your property would put you in default.
Other standard default rules apply to a reverse mortgage as well. If you were dishonest on your application, that would mean the bank could request full repayment. Of course, using the money for illegal activities also puts you in default. Hopefully, you’re looking to use the funds to consolidate debt or pay for repairs and not to do anything illegal!
Great, You Answered, “What Is A Reverse Mortgage.” Is It Right For Me?
Everyone’s financial situation is different. A reverse mortgage is not for everyone, obviously, but it is an incredibly excellent financial tool for a wide variety of personal circumstances. If you are 55 years or older and own a property, that home has likely appreciated significantly in value. If you purchased your home 30 years ago in Toronto, your home’s value might have increased tenfold. Imagine what you could do with $500,000 in cash without any need to make any monthly payments. It’s just yours. Of course it interest accumulates on that money, but in terms of monthly payments, you would have no obligations. You could significantly streamline your finances, pay off debt, and buy a few fun things for yourself!
At Citadel Mortgages, we generally find that reverse mortgages are good options for our clients. Between the two banks that offer them in Canada, they usually have reasonable rates, and the terms are a great fit. It cannot be stated enough how invaluable not having a monthly payment is, especially during retirement, when income might be tighter. Having the money to pay off debt and ensure that you can keep whatever income you have becomes critical. A reverse mortgage can provide that with ease.
One other benefit for seniors is that the money you receive from a reverse mortgage does not affect any of the other supplemental income programs. Your Old Age Security and Guaranteed Income Supplement amounts will remain the same. The only difference, of course, will be that the money you receive will pay off your debt. In turn, this will mean that your monthly cash flow will be significantly more positive. Instead of watching your OAS or GIS payments go towards credit cards, you can watch it stay in your savings accounts where it belongs. Even with a HELOC, which can also pay down credit card debt, you’d need to watch your payments go towards the HELOC balance. If you want to bank your supplemental payments and not pay off debt with them, the reverse mortgage is the right solution for you. No other loan product on the market will achieve this level of financial cash flow freedom.
If you think you might be a candidate for a reverse mortgage, consult with your mortgage broker to find out what is the right option for your financial situation. Explain what you’re trying to achieve, and your broker can recommend the right products for you. The chances are that if you meet the eligibility requirements, a reverse mortgage is your best option to get money quickly and easily!
By using a mortgage agent or mortgage broker from Citadel Mortgages, you will be able to ask all the questions you have and be ensured you get the best advice and mortgage product for your mortgage needs. Contact us here at Citadel Mortgages to become mortgage-free sooner!
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