Guest contributor: Emmanuela Urbani, Licensed Mortgage Agent
There are a lot of misconceptions out there about reverse mortgages. Frequently, when I mention the words reverse mortgage to my clients, they immediately become sceptical. Let us take some time to debunk a few myths surrounding reverse mortgages and provide more insight on when to consider this option.
What is a reverse mortgage?
A reverse mortgage is a mortgage for those 55 and older who own their own home and may not qualify for a regular mortgage. There are a few different reverse mortgage products with various lenders. Each product should be reviewed to determine what best fits your needs.
What does a reverse mortgage allow you to do?
A reverse mortgage allows you to unlock equity from your home. With a reverse mortgage, you have the option of receiving a monthly payment from your equity instead of paying what would normally be your monthly or biweekly mortgage payments. Hence, you can receive funds rather than pay them. You can also choose to simply pull out a lump sum from your equity when setting up the reverse mortgage either in addition to the monthly pull-out or instead of. Like a regular mortgage, a reverse mortgage will continue to build interest throughout your term. Most reverse mortgage solutions allow for optional interest payments monthly to reduce the amount of interest that adds up on your mortgage.
Who should consider a reverse mortgage?
If you have tried to get a home equity line of credit or an alternative home equity mortgage but do not have the income to qualify, a reverse mortgage is frequently a better solution than seeking private lending. Furthermore, because it is secured to your home, it is cheaper than an unsecured loan or credit card. Some individuals also like to consider a reverse mortgage to provide their family with a living inheritance (providing benefits to their heirs while still alive). Also, if you are planning to downsize down the road but are hoping to stay in your home for just a little longer, a reverse mortgage can help bridge the gap before you downsize and become mortgage free. A reverse mortgage may also be a good solution if you are looking to age in place and need extra funds for your retirement. Or, perhaps, you simply need to improve your cash flow; eliminating your mortgage payments through a reverse mortgage can go a long way towards increasing the amount of cash available to you. As with all mortgages, it is important to consider all the options available and understand how the advantages and disadvantages affect you in your specific situation.
What happens when you pass away or transfer the property to a child/relative?
When you pass away or decide to pass on your home to a child or relative, the individual inheriting your home has the option of selling the property to pay out the reverse mortgage or paying out the reverse mortgage either with personal funds or a regular mortgage product.
Myths about reverse mortgages
1. Can you owe negative equity to the bank? Meaning, can your reverse mortgage end up being more than the value of your home? No, it cannot. Reverse mortgage lenders have strict guidelines on the percentage of equity you can pull from your property. In addition, there are regulations in place that cap the reverse mortgage at the value of your home at the time of sale in the event that the real estate market drops dramatically.
2. You cannot make payments towards your reverse mortgage. Actually, you have the option of making payments to pay down your interest. They are not required, but it can be a good idea if you have the funds to do so.
A few final notes
Unlike a regular mortgage or loan, your income does not factor into whether you qualify or not; only your age and the value of your home is taken into consideration. A reverse mortgage is the solution to consider if you are over 55 and do not qualify for a home equity line of credit or an alternative home equity solution. Be sure to reach out if you think this might be an option for you and want to investigate your unique situation in more detail.
If you're still unsure and would like more information on how a reverse mortgage works, reach out to Emmanuela. She has the experience and know-how to guide you through the available options and approval process.