What is a reverse mortgage?

A reverse mortgage is a loan, using your home as equity. In the United States, it is available to senior homeowners over 62, and in Canada, it is 55 or older. These loans provide directly funding access to home equity. Funding comes to a borrower as a lump sum, monthly payment, or credit line. The most unique aspect of a reverse mortgage is its dropped requirement of loan payments. Borrowers do not have to worry about monthly payments or keeping up with interest.

Reverse mortgages are paid off when a borrower’s home is vacated. Home equity is used to pay off the entirety of a reverse mortgage’s remaining value. As such, national regulations require reverse lenders to ensure the loan amount does not exceed a home’s value. Regulations also require borrowers cannot be held responsible for paying balances larger than their home equity.

How are reverse mortgages different from traditional mortgages?

Traditional mortgages are much less complicated than reverse mortgages for a few reasons. These loans revolve around a loaner providing funds in return for a future guarantee of repayment. Traditional mortgages have interest added across a 15- or 30-year period, paid off monthly. Reverse mortgages, on the other hand, have no guaranteed payback period.

Since the mortgage is paid off when the borrower’s home is sold, there is no definitive timeline. These loans have no monthly payments, but they have a much larger pool of equity to draw from. Senior Canadian homeowners can tap into upwards of 55% of their home equity, which sits at $531,000 (Source: Statista). Traditional mortgages, on the other hand, rely on credit scores and the loaner’s willingness to loan.

What are the pros of a reverse mortgage?

There are many advantages of taking out a reverse mortgage. These loans, secured by home equity, do not require income verification. The largest benefits of taking out a reverse mortgage, are, ironically, don’ts.
You do not: make regular mortgage payments; prove your income or pay taxes on borrowed money. You do not pay back loans or interest costs before your home is sold. You also do not have to worry about not being able to afford the cost of these loans. Remember, loaners are federally required to ensure you can afford the entire price of a reverse mortgage.

Reverse mortgages are even more useful in their forms of funding. Most lenders allow homeowners to tap into their equity in six ways:

• Lump-sum: all the loan’s value, paid out immediately after the loan closes. Lump-sums have fixed interest rates.
• Term payments: lenders provide borrowers with equal monthly payments for a set time (i.e., 10 years, 20 years, etc.).
• Annuity: if one borrower lives in the home, the lender will pay out the loan in steady monthly payments.
• Lines of credit: lenders provide borrowers with a line of credit to tap into. This form of funding is often the most useful, as interest is only payable on the funding borrowed.
• Annuity + lines of credit: monthly payments provided to the borrower, also include a line of credit for future use. If a borrower wants access to more funding, they can just use the credit line.
• Term payments + lines of credit: lenders give borrowers equal monthly payments for a fixed time, in addition to a line of credit to withdraw from.

The wide variety of funding is one of the reasons why many retired homeowners prefer reverse mortgages. Of course, with all these benefits in taking out a reverse mortgage, it may seem too good to be true. That is because it often is if you do not choose loans carefully.

What are the cons of a reverse mortgage?

As with the positives of a reverse mortgage, there are negatives. Taking out a reverse mortgage can significantly increase debt late in a person’s life, sometimes not allowing them to pay it back before passing away. In addition to increasing debt, reverse mortgages can reduce equity used to pay off future debts. Interest and other fees knock away at equity as well, added to your total debt. Removing costs from equity can result in less equity for family descendants.

Borrowing equity through a reverse mortgage may also result in higher interest rates. T The average traditional mortgage within Canada holds a 1.4% to 3% interest rate. Reverse mortgages are upwards of 5 times larger, at an average 6.34% interest rate. There are also only two lenders that offer reverse mortgages in Canada, HomEquity Bank, and Equitable Bank. This allows them to potentially offer higher rates than if there were more competitors. Smaller companies often pretend to be a licensed lender, although the above two are the only available in Canada.

How do I find and apply for the best reverse mortgage for me?

There are only five common things lenders look for: your age, home equity, home value, location of your home, and current interest rates. With only five things to look for, if you are 55 or older, lenders often approve reverse mortgages. As reverse mortgages involve older homeowners, lenders often give you access to larger equity funding.

However, even though it is easy to get a reverse mortgage, it can still be exceptionally difficult to find the right mortgage for you. When approaching a lender, you will be limited to their deals and terms. Mortgage Zilla Group offers services designed to help ensure you receive the best terms on your mortgages. We connect with the best lenders to get you the best options. Our services revolve around the customer, and we will do whatever we can to help you get the best mortgage. Mortgage Zilla Group’s experts study the mortgage market, making sure that you apply for only the best. We will take care of connecting you with the best reverse mortgage and lender.