All About Reverse Mortgages

A reverse mortgage is a mortgage loan that allows seniors (55+ years old) to refinance or purchase a home.

Three of the main benefits of a reverse mortgages are:

1. No income requirement – 

2. No credit requirement – 

3. No payment requirement – 

What?! You don’t need to have an income or any credit, and you don’t need to pay for your mortgage?? Correct.

The Common Myths of Reverse Mortgages

1. The Bank Owns My Home:

The homeowner owns their home. There is no change in ownership and never will be. 

2. The Bank Can Force The Homeowner to Sell or Foreclose:

As long as there is a homeowner who lives in the property, the bank will never foreclose or force a sale. 

3. Upon the eventual sale of the home, I or my beneficiaries will owe more than the house is worth:

This is not the case. The reverse mortgage lender will only get the value of the property and will not go after more homeowner assets, even if the home is “underwater” on the mortgage.

Reverse Mortgage Use Cases

• Pay off debts and/or relieve financial pressures.
• This is often the most cited reason to get a reverse mortgage.
• Preserve investments and maintain financial independence. 
• This is a big one! A reverse mortgage can increase someone’s net wealth when combined with financial planning.
• Arrange for in-home care or renovate to improve home’s mobility
• Give loved ones an early inheritance
• Help your children or even grandchildren buy their first home
• Pay for unexpected expenses
• Buy a vacation property
• Improve tax-free cash flow

Main Reverse Mortgage Downside

OK, so reverse mortgages have gotten a lot of flack… First, in the US, reverse mortgages are not well regulated and there have been instances where seniors have been kicked out of their own homes. This is not the case in Canada: reverse mortgages are well regulated and these issues don’t come up!

The one real downside of reverse mortgages is that they have higher rates than normal bank mortgages. Almost all other reverse mortgage disadvantages stem from this higher rate.

A conventional mortgage may have a rate of 5%, whereas a reverse mortgage would have a rate of 6.5%.

The reason why the reverse mortgage has a higher rate is due to the fact that these mortgages are inherently more risky to the lender. Depending on how long the homeowner lives, it’s possible that that homeowner will owe more than the equity available, and since the reverse mortgage lender will never go after any additional assets, the lender may lose money on the mortgage.

So why the heck would anyone want a reverse mortgage?

Well, for starters, seniors who have no credit, or do not have enough income to satisfy a specific amount, would require a reverse mortgage over a traditional mortgage.

Secondly, a reverse mortgage, no matter how much money is outstanding, and no matter what happens in the market, the mortgage will never be called (requested to be repaid). Remember, this is a no payment mortgage, allowing seniors to stay in their home for as long as they live without worrying about mortgage payments or renewals, etc.

Furthermore, if we compare home equity lines of credit (HELOC) vs reverse mortgages, after a while and once the limit of the HELOC is reached, the borrower would have to start paying monthly payments… With a reverse mortgage, there’s no limit and monthly payments are never required to be paid.

Additionally, even if the home’s value decreases drastically, and decreases to a point where the mortgage is a higher value than the property, the lender eats the loss; and there’s no requirement to pay any other money (apart from the proceeds of the sale) from the client’s estate.

OK, lastly, with any conventional mortgage or HELOC, if there are two borrowers at the outset of the mortgage/HELOC, and one passes away, this technically opens up the mortgage/HELOC to be called as the terms of the mortgage (IE, two borrowers) has changed. The mortgage/HELOC can be called at this time, forcing repayment or sale. With reverse mortgages, a death of one of the borrowers may be expected and no change occurs.

I hope I was able to provide you with a few benefits of why some borrowers go with reverse mortgages. Yes, their interest rates are higher, but there are many benefits and for the right borrower, it’s a fantastic solution.