Mortgages come in all shapes and sizes. While we are generally aware of fixed and variable, there are literally dozens of mortgage products out there. One of those types is a reverse mortgage.
Most Canadians have only a baseline knowledge of mortgages in general, let alone a more complicated one like the reverse mortgage. This is your one-stop-shop for not only understanding what a reverse mortgage is, but how to qualify for one and how it applies to your specific situation.
A reverse mortgage is the type of home loan where you can use money from home equity. The main purpose of this is that you won’t have to sell your home. A reverse mortgage is also known as an “equity release” and you can borrow as much as 55% of the home’s current value.
The maximum amount that you can borrow during a reverse mortgage depends on 3 things: the lender in question, the appraised value of the home, and your age.
Paying back the loan happens when you move out of the home, sell it, or the last borrower on the title dies. The great thing about a reverse mortgage is that there are no payments on it until the loan becomes due.
Keep in mind that the longer that you go without making a payment, the more interest that will be owed on the reverse mortgage. Also, at the end of the term of the loan, you might wind up with less equity in your home than before.
There are two criteria that must be met to be eligible for reverse mortgages: you must be the homeowner and at least 55 years old. Not only that, you must include each person that is listed on the title in the reverse mortgage application and they must also be 55 years old in order to be eligible.
The lender may also as that you and the others listed on the title get independent legal counseling. Not only that, but they may as for proof of said advice. The home being used for the reverse mortgage also has to be the primary residence, meaning you have to live in it for at least 6 months of the year.
When applying for a reverse mortgage, the lender will take the following into consideration:
This is where things can get a little bit lost for those unfamiliar with reverse mortgages. Before you can apply for one, you have to pay off and close any lines of credit or outstanding loans that have been secured by the home. This can include a mortgage as well as something like a home equity line of credit (HELOC).
The money that you get from the reverse mortgage can be used to pay those loans off. You can also use the reverse mortgage for just about anything else that you can think of. That can include helping with regular bills, repaying debts, covering healthcare expenses, or providing improvements or home repairs to the home.
Keep in mind that there are some limits to reverse mortgages. The first limitation is that getting a reverse mortgage may potentially limit any other options that you have for financing secured by the home.
For instance, if you have a reverse mortgage, you might not be able to take out the aforementioned HELOC or a product similar in nature.
On the flip side, one good thing about a reverse mortgage is that you can get the money from the loan in a couple of different ways. The first is in a one-time, lump sum payment. The other way is to get some of the money from the loan up front and then take the rest over a designated period of time.
Be sure to talk to the lender about the potential payment options that they offer on their reverse mortgages. On top of that, check with them to see if there are any fees or restrictions that you need to be aware of.
One of the most appealing options to reverse mortgages is that they don’t require regular payments. There is the option to repay both the principal as well as the interest in full at a designated time. Keep in mind, there may be pre-payment penalties or fees if you pay the reverse mortgage off early than specified.
You would need to pay back the amount owed in the event of a move, selling the home, defaulting on the loan, or when the last borrower passes away. Don’t forget that the home needs to be the primary residence as well.
When it comes to defaulting on your reverse mortgage, this can happen by:
The individual rules depend on the lender as each has a specific definition of what a default may be. Be certain to ask your lender what their default conditions are. There are specifications that could take you by surprise otherwise.
When you pass on, it is up to the estate to pay off the principal and interest due. Should there be multiple people on the loan, it has to be repaid when the home is sold or the last person on the loan has passed away.
Also, the amount of time that you have to repay the loan can vary based on lender. For example, should you die, the estate will have 180 days to repay the balance of the loan. But if you move into assisted living or long-term care, it could be a year. As always, be certain to consult the lender on these details before finalizing a reverse mortgage.
There are several costs that you should be aware of when looking into reverse mortgages. That can include a higher interest rate than you might see on a traditional mortgage. It can also mean a setup fee, home appraisal fee, and legal fees. The legal fees are for both independent legal advice and the closing cost. There are also potential prepayment penalties should you pay the reverse mortgage off before it comes due.
The first place that you need to start when inquiring about reverse mortgages is with the team here at Lotus Income. We have years of experience that can get you the answers that you need. The most important thing when it comes to finding a reverse mortgage is knowledge. Being armed with the answers to your questions can mean the difference between a favorable loan and one that you regret.
Call our team today or check out our FAQ page to find the answers to your questions. We can get you started down the path to a reverse mortgage today.