Retired people sometimes find themselves in a cash bind, but there might be a solution for homeowners in the form of a reverse mortgage. You’ve probably seen ads on television or in magazines about this type of mortgage and wondered if it could work for you. Reverse mortgages can be a useful tool for seniors who have built up equity in their home and are looking to supplement their cash flow in retirement but they are not for everyone.
What Is a Reverse Mortgage?
A reverse mortgage is a loan secured by a home, like any other mortgage. Unlike a regular mortgage, no re-payment of the loan is required until the home is sold, the last surviving spouse dies, or the owner moves out.
Why Is It Called a “Reverse” Mortgage?
A regular mortgage balance decreases over time as payments are made, until finally it is paid off. In a reverse mortgage, the balance increases over time due to interest charges. This is the reverse of a regular mortgage.
How it works: Depending on your age, marital status, and the property, you can unlock as much as 40 per cent of the appraised value of your home. (See right-hand box for additional requirements.)
Let’s say you’ve paid off – or nearly paid off – a conventional mortgage and the home is valued at $300,000. You could wind up with a tax-free $120,000 cash advance. You can take the money in a lump sum or in instalments over the time you remain in the home.
Payments aren’t due until the home is sold or the surviving spouse dies, although you can opt to pay the mortgage earlier. The lender makes its money by recovering the principal and interest when the home is eventually sold.
On the face of it, these mortgages appear to be a good deal for several reasons:
However, before deciding a reverse mortgage is the tool for you, there are some disadvantages to consider:
Proceed with Caution: If you think a reverse mortgage might work for you, consult with your accountant first. Generally, a reverse mortgage is a last resort alternative for homeowners.