What is a Reverse Mortgage?

[MortgageQueen]

Hi all. Here is the link to my newspaper column this week http://www.springwaternews.ca/ (turn to pg.11). . and if you're really a fan. . .look at page 10's Dear Ann column. I wrote that too!

or you can save yourself the trouble and read it below. .
Sorry about the funny typestyles. It just came out that way when I copied and pasted. .

What is a Reverse Mortgage?
As the Baby Boomers grow older, many find themselves struggling financially as they enter retirement. Some worry they’ll be able to afford to even keep their home as the years pass by.
Others have sufficient income to live on but would like to travel more. Many live adequately enough off their pensions, but have nothing left over for major home repairs or large purchases. So who should consider a reverse mortgage?
First I should clarify that a reverse mortgage is indeed for the “over 55” group. I would also like to stress that one should seek out a professional opinion (who is strictly looking out for Your interests) before committing to a Reverse Mortgage.
That said, here is some basic information to get you started. A Reverse Mortgage is literally a mortgage in reverse. Instead of making payments to the bank, the bank is making payments to you. The average amount of equity you are allowed to access through a Reverse Mortgage is aprox. 45%. So if your home is worth $300,000, you will get access of up to $145,000. The customer can receive that in a lump sum or in payments.

Now let’s look at the Pros and Cons. The positives are:
1. A fact that all will appreciate. The money received is tax free.
2. Another positive is one will never end up owing the bank. If they miscalculate, that’s their
problem.
3. Most important to many is the fact that they can remain in their home as long as it’s feasible
for them.

The negatives stack up a bit more, but this is where professional advice is needed. A few are:
1. We’ll start with the interest rate, which is 2 to 3 percent higher than a standard mortgage.
2. The interest is compounding, as is your debt as each year passes.
3. If one is a younger retiree, the money one is eligible to draw off the equity is less. (perhaps as
low as 25%)
4. If one changes their mind part way through, penalties do apply and can be stiff.
5. The only acceptable (or non-penalized) reason to break term of mortgage is death or moving
to an assisted living residence.

Now let’s look at a few statistics. The average length of time a resident lives in their home after getting a reverse mortgage is 12 years. The average remaining equity in the home after that time is 50 percent (taking into account interest accrued and increased value of home after 12 yrs.) While these are just statistics, they at least give one an idea of what to expect.
Other points to consider are what funds will be available (or left over) should one need to go into an assisted living home? Could one downsize to a smaller but pleasant home and save substantial interest costs? Would a secured Line of credit be a cheaper option?
These are just a few of the points to ponder before you meet with your Finance Professional to further consider all your options. Having such guidance can be crucial in making the best decision.

[marstec]

I've always thought products that are hawked aggressively on television can't be good for the consumer.

[Darth Penguin]

TBH, RMs scare me.

1) if I/we die/sell ..does the mortage company get their money first?

2) can our heirs end up owing money if/should we default?

[MortgageQueen]

[QUOTE=Marstec
I've always thought products that are hawked aggressively on television can't be good for the consumer.

[B]Yes, so do I. This is a product only useful to a select group of people. Most Financial advisors (including myself) would try to find a better option. That is why I tried to present the pro's and the con's. But. . . for some people, it truly is a good fit.[/B]

TBH, RMs scare me.

1) if I/we die/sell ..does the mortage company get their money first?

2) can our heirs end up owing money if/should we default?

Very good questions.

1. Think of it this way, if you sell your house now while having a regular mortgage, who get's paid first? Yes, the mortgage company. It doesn't matter what kind of mortgage you have, the Lender always get paids first.

2. No, your heirs will not owe money (with exception to property taxes and bills owing to the estate) The Lender carefully calculates "lee-way" in the mortgage so that there's plenty of "room" for things like default, or possibly even a homeowner living beyond the years expected in the house. If it's a really nasty situation, they'll simply end up with nothing. (not very common though)

[JadeDragon]

I also recently wrote about reverse mortgages. You need to really understand them before jumping in.

[RSteiner]

Thanks for sharing this information. It is a great information and a great help especially to those who are not familiar with this topic. Reverse mortgages are a bit of a niche financial product, as they are only available to seniors. The loans can offer some funding for retirement, but the Consumer Financial Protection Bureau is looking into the products to see if any additional legislation may be warranted. This will be a big help to those who are in need. Want to know more, feel free to visit our website. Source for this article: Reverse Mortgage

[MortgageQueen]

While this is helpful, it is an American article and Canada has different rules and regulations

[MortgageQueen]

Your age bracket is correct, but a reverse mortgage is quite different from a home loan. If you are seriously looking at on, be sure you do your homework.

[brunt]

Despite the relatively tame-sounding name, it should be pointed out that reverse mortgages are loans, plain and simple. Loans with interests rates that are larger than regular mortgages.

I wouldn't touch one with a ten foot pole. Personal opinion here - they are legitimate products, not scams. It's just that there are cheaper ways to get loans.

2) can our heirs end up owing money if/should we default?

Never, ever, ever. This is a common misconception. Under our system of law, it is not possible for one person to force a debt onto another who was not party to the agreement. (It should be noted that spouses are a special case where property is considered to be joint, and agreements by one can have claim on this joint property, so a loan to one spouse can have to be repaid by the other spouse)

Collection agencies bank on this misconception by hounding relatives of deceased persons trying to convince them that they are liable for the debts of a person - often trying to get money from the children of a deceased parent.

Once again, it cannot, under any circumstances possible be this way.

[bobbyreyes]

Many Canadians are heading towards retirement without having much balance in their bank accounts. I think, taking a reverse mortgage can be a good idea for retirees. Approx 20% of the Canadians are aged 55 plus and they will drain their saving in the first 10 years of the retirement. In such case they will go for reverse mortgage to secure their future.