Unlocking Home Equity: Understanding the Benefits and Risks of Reverse Mortgages

Everyone has heard of a mortgage.  That is when a financial group or institution lends money so that individuals can purchase a home.  The buyer agrees to pay back the amount of the loan plus interest over a period of time.  As the payments are made, the buyer owns more and more of the property.  Say the home is purchased for $100,000, and the buyer has paid off $50,000 of the loan.  The buyer has accumulated $50,000 of equity or ownership/value.  But if the property values have increased, then the buyer actually owns more equity or value.

Unlocking Home Equity

A reverse mortgage is a loan that provides cash in the amount of current equity, and the loan is repaid when the home is sold.  This is a real option for an older adult who needs an influx of cash but doesn’t want to sell their home.  The homeowner keeps the property and gets cash.  This is particularly advantageous for older adults who have a limited income stream. Refinancing may not be feasible because their income could not cover a new mortgage payment.

In Canada, to be eligible, you must be at least 55 years old, as well as anyone else on the property title.  So, for a married couple, both must be at least 55.  However, if they have included one or more of their children as owners of the property, the reverse mortgage is not an option.  In addition, they must live in the property as the principal residence.  So, a reverse mortgage is not applicable to a summer home that they stay at for only a few months of the year.  Plus, the property must be valued at, at least $250,000.

Types of Reverse Mortgages

There are different types of reverse mortgages.  There are both open and closed mortgages.  An open mortgage gives the applicants more choices until the loan moves to a closed term.  A closed term has more limited prepayment conditions but generally comes with a lower interest rate.  Interest rates can either be variable or a fixed rate. 

Of course, there is an application process and fees.  It starts with an online application, and as the process continues, you will be required to produce evidence of age, the property and its condition, appraisal documentation, and possibly proof that you have had legal advice.

Reverse mortgage types also can vary in how you receive the funds.  Some will allow the individuals to have the full amount at the closing.  Others provide a single lump sum and the rest in smaller withdrawal increments, which can either be at scheduled times or simply when requested.  The CHIP reverse mortgage has been around for quite some time.  In 2014 it changed its name from the Canadian Home Income Plan (CHIP) to the CHIP Reverse Mortgage.  It is a popular choice.

Expert Guidance for Your Financial Future

If you are an older adult and considering refinancing or a reverse mortgage, a good place to start is to call the folks at easyhouseloan.ca.  Their experts can provide information about the various options,  qualifications, and criteria that will help you and your family make the best decision for your circumstances.