Pattie Lovett-Reid: It may be time to change your thoughts on reverse mortgages
If there is a financial product out there that people seem to love to hate, it’s a reverse mortgage. But is that fair?
Here are a few facts that might change your perspective and “reverse” some of the misconceptions out there.
What is a reverse mortgage?
Reverse mortgages are loans that allow you to access some of your home’s equity without making a payment or forcing you to sell. However, a reverse mortgage loan ultimately does have to be repaid either when you move out of the home or when you die. There are some extenuating circumstances when the loan may need to be paid back sooner. For example, if the home is no longer your principal residence, you fail to pay your property taxes or homeowners insurance, or do not keep the home in good repair.
Who qualifies for a reverse mortgage?
You must be 55 or older and the home must be your primary residence. If you qualify, you can borrow up to 55 per cent of the value of your home (based on home value, home type, and the borrower’s age and gender). Before a reverse mortgage is approved, the borrower will be required to get independent legal advice, a home appraisal, and in some cases, have a discussion with their financial advisor or even their family. Statistics from HomeEquity Bank show the average customer for reverse mortgages is 72 years old, the average mortgage size is $170,000, the average loan to value is 30 per cent, with an average credit score of 750.
Why is this product so feared?
HomeEquity Bank said fears that the bank would take ownership of the home, concerns about equity erosion, the false belief that borrowers may owe more than the house is worth, and the inaccurate fear that if one spouse dies, the other will have to move out, are among the top reasons their customers avoid reverse mortgages.
Who should avoid reverse mortgages?
A reverse mortgage might be a bad idea for someone who has a lot of debt and struggling with financial obligations. It may make more sense to sell in this case, says HomeEquity Bank. The bank adds this product is also not a good idea for those looking for a short-term solution, as there are pre-payment penalties, or someone who is able to get conventional mortgage or a home equity line of credit (HELOC) at a lower rate.
Who does a reverse mortgage work for?
According to Equitable Bank, reverse mortgages can work in a number of scenarios. For example, they could work for seniors who want to stay in their homes as long as possible.
“Retirement homes and assisted living are expensive and the transition of selling and moving can be disruptive,” the bank said. “That said, renovating a home for senior living, let alone maintaining it, requires material cash flow. Reverse mortgages are often used to finance this.”
Equitable Bank also said many of their clients use reverse mortgages to pay out their forward mortgage, relieving them of the financial burden of making regular payments. It can also work toward the purchase of a small home as seniors look to downsize.
The ultimate proof of why this might be a product of choice for those wanting to stay in home just might be in the numbers. I asked HomeEquity Bank to run a few scenarios based on an approximate home value of $750,000, with a reverse mortgage of $150,000, 10 years remaining on the home, a five-year interest rate term of 5.74 per cent, and finally, annual home appreciation at three per cent and five per cent.
The numbers are compelling when you look at how much is borrowed against the home, and even with modest appreciation how much money is left for the homeowner or their heirs. In other words, in many cases, there will be money for long-term elder care or even an inheritance if that is your wish.
A reverse mortgage is a personal decision that may have some unwarranted shame attached to it. It is your retirement, and for seniors who want to stay in their home and pay off debt, help out a family member, eliminate mortgage payments and receive money tax-free (not interest-free), it might be the product of choice.