Is a Reverse Mortgage a Good Idea?
Is a reverse mortgage a good idea? If you’re one of the many hundreds of thousands of people looking to find out the pros and cons of a reverse mortgage, then this article is one you’ll want to read. Now, before making any kind of decision, readers should take the time to read this reverse mortgage guide that addresses any questions or concerns an individual might have. Many will find the link to the free guide above extremely helpful; due to the mass of incorrect information out on this type of mortgage financial solution.
One specific point that needs to be addressed upfront concerns age. If you’re a visitor reading this now and you’re not 55 years of age (in Canada – 62 in the USA), then this option is not one yet available to you. A reverse mortgage solution is only for senior homeowners. This might be the first time you’ve heard this—which is unfortunate. However, it makes sense. This is one of the most diverse and often misunderstood financial solutions out there, but it is also very beneficial to learn as much as you can about this. As long as you’re discovering the most relevant and accurate information concerning reverse mortgages, there are advantages to be had.
So, What Exactly Is a Reverse Mortgage?
A reverse mortgage loan is kept simple and easy for the applicant. The process allows homeowners, age 55 and older to gain access to a portion of their homes equity earlier than normal, and without the common annoyances that come with a traditional home loan. The equity is converted to cash and can be received in one lump sum payment or in regular payments. The applicant can also choose to use both options. This is a life-term loan though, so it is either for the lives of the homeowners, or the life of the ownership of the home. You’re credit rating has nothing to do with the approval process (if this hasn’t already been mentioned).
Also, if you’re married or in a significant relationship, both partners must meet the age requirements. There are several other exceptions to being eligible for a reverse mortgage as well, which we will go over. The biggest pro benefit to acquiring this type of mortgage financial solution lies in how it does away with having to meet monthly home loan payments. On top of this major plus, you also don’t have to meet any repayment obligation either. It might sound too good to be true, but it really is true!
If you do meet approval for a reverse mortgage, you can choose to make voluntary payments, but these are not required. Some prefer to pay off the interest that builds month to month, which opens a line of credit. This can be a means for carrying out home repairs or enhancements—which is a fabulous bonus. And, if you’ve been thinking applying and gaining approval for a reverse mortgage is complicated, it isn’t! Your income is not subject to verification either and is not that important for the application process and review. You simply don’t have to jump through all those stressful hoops and extended escrow process like you do when you apply for a traditional loan. However, there are specific pros and cons to a reverse mortgage in Canada and elsewhere in the world, so why don’t we look at that right now.
Is a Reverse Mortgage a Good Idea?
Remember, a reverse mortgage is known by many different names across the globe, but it is only in Canada and the US where it is specifically known as a “reverse mortgage.” Let’s not forget, as we review the pros and cons—the balance of a reverse mortgage does grow annually because most choose to not make payments on it. However, you don’t have to worry about leaving a huge expense behind on your loved ones when you pass away either. Statistics show that 99% of homes on a reverse mortgage program have finances leftover when the homeowners pass away. The house is handed down to the estate. So, the balance of a loan like this can never inflate to the point that it is more than the homes value itself! Let’s list the pros and cons now, since we are sure you’re excited (or anxious) to see these:
Reverse Mortgage Pros
• This mortgage loan is totally “tax free income” so you don’t have to worry about owing anything to the Government
• A reverse mortgage never has to be repaid as long as you and your partner remain the homeowners and live in the residence as your primary place of residence
• When you have a fixed or stretched budget, you have the flexibility of eliminating monthly payments
• You choose when to repay the loan, but it isn’t mandatory
• The amount owed can never exceed the real value of the property
• If housing values drop, or interest rates increase the homeowners aren’t responsible, nor are their beneficiaries
• The funds can be received in 3 different methods: lump sum, payments, or a mixture of the two
• Increases finances so a retiree or couple can live more comfortably
Reverse Mortgage Cons
• Interest can accumulate on the amount that is borrowed
• Reverse mortgage rates can be higher than conventional lines of credit
• Borrowing against your home can take away from amounts available to beneficiaries
• Early repayment can result in prepayment penalties (similar to any mortgage product)
• The amount that can be borrowed is somewhat dependent on geographic location and the type of housing owned
If you weigh the pros and cons and still decide to apply for a reverse mortgage is right for you, you will still have some other questions. For example, who is going to be more likely to take out this type of home loan and when (or if) approved, how can those funds be used?
Who Should Apply and Upon Approval, How Should Funds be Used?
Homeowners can do whatever they want with the money they are awarded from a reverse mortgage. Whether it is for dramatic home repairs and upgrades to going on a much-deserved getaway—it’s that simple. When you’re sick of making those month-to-month payments, this seems to be the route to take for most. But, you should make wise use of the funds. For example, paying back the existing home mortgage is a smart move. Most homeowners do use the money to finish paying off a mortgage and then do what they want with the rest. It makes sense, right? There are millions of reasons why people apply for a reverse mortgage and just as many on how they spend the funds. Some do it just for the extra cash; but no matter who, why or how—the entire process remains tax-free. If you’re a couple who is 55 or older and you need the cash, then the reverse mortgage is an excellent option.
To add more to who should apply for a reverse mortgage, or rather, who does—anyone who wants to free up the cash should if they think it will benefit them in the long-term. Those defined as “house-rich” are more likely to go the reverse mortgage route. When there are great amounts of cash invested in a home, this is the most viable way to get it back out without taking anything away. In Japan, they call it a “Home Pension.” A pension is like a rainy-day umbrella. So, with a reverse mortgage, you can actually have the money put in an equity line of credit for that rainy day. This is sometimes the better option.
One final point on these reverse mortgages and understanding them on a global level is understanding that they fall under different names in different parts of the world. The term can create confusion and does lead to some inaccurate details too. Also, “reverse mortgage” is normally only utilized in North America, so elsewhere it might be interpreted inaccurately.
In Japan, these are known as “home pensions”, which is one of the better descriptions for them. The money that you put into your home, no matter where you are globally, is accessible via this pension. It’s a financial investment and one that homeowners can take advantage of as they age. However, in closing, the concept of a ‘home pension’ is a great way to think of a reverse mortgage and what it is really doing.