To qualify for a reverse mortgage when you own your home, the property must be your principal residence, must have equity and you must also be 55 years of age or older. It does not matter if you have a current mortgage or line of credit on the property as long as equity is enough to enable payout. A reverse mortgage pays out 55% of your equity less other costs.
What Is Your Current Understanding Of A Reverse Mortgage?
Here we address the question – “how does a reverse mortgage work if you own your home?”
A reverse mortgage has two main qualifying criteria and when you own your house, the following must also be met;;
- the home must be your principal residence,
- you must be 55 years of age or older,
- it is also a huge advantage if your home is free and clear.
How Does A Reverse Mortgage Work If You Own Your Home?
The Question is “how does a reverse mortgage work if you own your home?” In order to answer this question let’s understand the criteria used to be eligible for a reverse mortgage.
How Do Reverse Mortgages Work?
There are two main criteria qualifying for a reverse mortgage. The first one is you must be 55 years of age at the time of application and the second one is you must own your own home.
You cannot rent a condo, or an apartment or a townhome or a single-family home. You must be the registered owner and live in the home as your principal residence.
You may have a home that is free and clear, meaning there is no registered mortgage or line of credit outstanding. However, this does not mean you have to own your home free and clear to get a reverse mortgage.
Can You Get A Reverse Mortgage If You Own Your Home?
Yes, in this case you would simply connect with a Certified Reverse Mortgage Specialist, review the details and the process of applying for a reverse mortgage, and they will submit an application on your behalf for a reverse mortgage.
Reverse Mortgage Example
Let’s say for example, you own your home, and you have a $190,000 mortgage with a 5-year fixed rate with 2 years remaining on the term. Your property is worth $750,000 but you don’t want to make any monthly payments as you are short of cash at the end of every month, and your $900.00 mortgage payment would come in handy to ease the cash flow.
You are 74 years of age and, using a reverse mortgage calculator, would most likely qualify for a $225,000 reverse mortgage. You must pay out the $190,000 mortgage, taking your house value of $750,000 – $190,000 = $560,000 in equity.
What Percentage Of Equity Can You Get On A Reverse Mortgage?
You can take out up to $225,000 in a reverse mortgage, remember a reverse mortgage only lends up to a maximum of 55% value of your home.
I am using a 30% loan to value amount for this scenario, as there are variables that determine your maximum lending amount. You can either take all the $225,000 in a lump sum or a combination of the lump sum and a monthly top up.
Another option is take it out now and maybe invest the remainder of $30,000 in a mutual fund or simply keep it in your bank account as a rainy-day fund.
Pros And Cons Of Reverse Mortgage
Let’s assume your home is increasing in value by 5% per year and your interest rate on your reverse mortgage is 4.05% per year. At the end of the first year your home has increased to $787,000 and your interest accumulated is $9000, your total net gain is $28,000 while you are remaining living in the comfort of your home and the value is increasing and you are not making a mortgage payment.
If you did this for the next 10 years, the value would be $1,116,741 and the interest accrued would be $91,000 giving you a net gain of $1,012,000. Again, while you are living in the comfort of your home and leaving plenty of equity for your family’s inheritance.
Keep in mind you may only want to take the $190,000 you need to pay off your current mortgage, it is entirely up to you. You can set aside the remaining $30,000 for future use or you can top up your monthly income with this money.
A disadvantage about a reverse mortgage is that the interest rate is slightly higher than a traditional mortgage, but the 2 products are very different and were created to provide different solutions for Canadians.
What Is A Reverse Mortgage Canada – A Solution For Seniors
The traditional mortgage helps Canadians purchase a home while a reverse mortgage was primarily designed to help senior Canadians remain in the home as they age and allow them to access their equity while remaining in their home. It provides Seniors with a solution to rising living costs, medical expenses and monthly income shortfalls.
The interest rate is less than taking out a second mortgage secured against your home with often double-digit rates, and an annual renewal fee falling into the thousands of dollar range, and cheaper than racking up your credit cards at 20-30%.
And no minimum payment has to be made with a reverse mortgage unlike the other options available. A reverse mortgage is typically a longer-term mortgage option. Most of our clients get a reverse mortgage to be able to live in their home where they have created so many memories for as long as they can.
Can You Pay Off A Reverse Mortgage And Keep Your House?
If you are using it as a short-term financing option, you will pay penalties if you pay it off before the 5-year term is up. Year 1 is a 5% penalty, year 2 is a 4% penalty, year 3 is 3% penalty, and years 4 and 5 are 3 months’ interest.
If you are planning to stay in the home and keep your reverse mortgage this pre-payment penalty will not apply. Transparency is key and this is good information to be aware of.
So, you can see that owning your own home in your senior years is a blessing as a reverse mortgage can open many options for living your best retirement. And the equity you take out of your home can be used for whatever you want.
You can clear up debt, pursue your passion or interest again, gift to family members from helping with university costs to home buying, or you can pay for your medications or home care. Some clients renovate their home to accommodate their needs or simply to update their home with improvements. Maybe topping up your investments is something you would like to do, the possibilities are limitless.
A Reverse mortgage is a niche product and I encourage you to join my webinar Reverse Mortgages Living Your Best Retirement. My clients have taken out a reverse mortgage to help themselves or to help others and there is no shame in gathering information on this product.
This may be a fit for you and this is a great webinar to address your questions and concerns. Ask yourself… “When is it a good time for your house to start paying me back?”
What happens when you sell your home with a reverse mortgage?
When you sell your home with a reverse mortgage the title company will send the required payoff amount to your reverse mortgage lender once your house has sold. Ascertain that the reverse mortgage loan is fully paid off with the proceeds and that your lender account is closed. Any extra money will be given to you.
What Questions Should I Ask A Mortgage Broker?
The top 2 questions that I would recommend asking a mortgage broker, or anyone that you are speaking to who is offering you mortgage advice (this includes your bank, your friends, your parents). What type of mortgage did you get, and why? What was your thought process, or strategy behind selecting your mortgage product? What strategy are you recommending for me, and why (what is it based on).
Are reverse mortgages transferable?
Reverse mortgages are not transferable and it usually belongs to one person or two married spouses. If one spouse dies but the surviving spouse is identified as a co-borrower on the reverse mortgage, the surviving spouse will stay in the house and the loan terms remain unchanged. Adult children and other nonspouse descendants, on the other hand, must pay off the debt when the last borrower dies. They have the option of keeping the house or selling it.
Are Mortgage Brokers A Good Idea?
When mortgage brokers first came on the scene, many years ago, the thought was that they were only there to help you get financing when you were desperate and your bank turned you away. Today, thanks to mortgage brokers, we have access to a competitive marketplace. Yes, that is right. Mortgage brokers keep the industry competitive by their very nature. By bringing options and choice to the consumer, it forces the banks to remain competitive for your business.
What happens at end of reverse mortgage?
At the end of a reverse mortgage, the loan must be repaid when the last surviving borrower passes away. Most of heirs will sell the house to pay back the loan. The heirs will not have to pay more than 95% of the appraised value if the loan balance exceeds the value of your home.
Are Mortgage Advisors Free?
The short answer is Yes, there is no direct out of pocket cost to you when using a mortgage broker. The way that the mortgage industry works, even if you are going in to your bank and using a mortgage advisor in branch, or you are using a mortgage specialist from a bank, who is paid on commission and not a salary, or a mortgage broker, who has access to more than just one bank and one lending product, the cost of the service is built into the pricing of your mortgage rate.
Can you lose your home with a reverse mortgage?
It is almost impossible to lose your home with a reverse mortgage since you borrow against your home’s equity and repay the loan with the proceeds of the sale. There aren’t many ways to lose ownership of a reverse mortgage because you still own your house, unless you fail to preserve three primary components of your home’s legal status.
Do You Pay A Fee To A Mortgage Broker?
The short answer is no. Most of the time, the lender that you select to go with, through your mortgage broker, pays your mortgage broker a referral fee. There are costs associated with setting up a mortgage, and these costs and fees are discussed as part of the process. Costs such as legal and closing costs. All borrowers are responsible for these costs. There are occasions when a mortgage broker will charge you a fee.
Who is eligible for a Reverse Mortgage?
You are eligible for a Reverse Mortgage in Canada if you are a Canadian homeowner and at least 55 years old. If you have a spouse, the spouse must also be 55 years or older to be eligible to become a co-borrower. However, more parameters are considered in order to qualify.
What Does A Mortgage Specialist Do?
A mortgage specialists work with you to obtain the best mortgage for you. A mortgage that works for you and meets your needs, not the banks. They do not work with just one bank or lending institution, s/he has relationships with many. Based on your needs, a mortgage specialist will go over your goals and your needs with you, and will use this information to identify the best lending product for you.
If you would like more information or a free consultation to see if a Reverse Mortgage is a fit for you, you can contact me below, and as a Certified Reverse Mortgage Specialist I would be more than happy to review your financing options with you and provide you with Expert Advice to Guide You Home.