Reverse mortgage: are you considering it? You surely don’t have to work with finances for you to know about this financial product: As realtor expert from Toronto, almost every day I hear about someone who went for it. Reverse mortgage is a unique kind of home loan that gives you the opportunity to get a part of the price of your home in cash.
This financial product may be also called "Equity Release", as in England, where it is quite popular. If you are older than 60, you feel you don´t have enough funds and the idea of monthly payments is somewhat horrifying for you, the reverse mortgage might be the right solution for you.
Briefly explained, when using the equity release, you get paid the money according to the value of your home, while the interest is accumulated as the time goes. The client or his/her spouse is allowed to stay in their home as long as needed, since the liability has to be paid back only after they sell the house or the client (or spouse) moves out or passes away. Typically, clients can take credit ranging between $20,000 and $500,000. It should not exceed 30% of the home price, or 40% if the client is over 70. In the next part of this article, we will examine some pluses and minuses of the reverse mortgage.
The mortgage is tax-free. You don't have to pay any monthly amount. The ownership of your home does not change. If you still have a mortgage on your home or any other debts, this may be a perfect form of paying them up, while freeing yourself from the monthly payment obligation. The interest can be paid step by step. In this case the debit sum does not increase. Another realty may be mortgaged instead of the original one (full price or part only). If you wish to end your mortgage any time, you can do so with no additional charges, provided that you have used this product for the minimum of 3 years.
Gradually, the interest rate becomes smaller. The financial institution has no chance of foreclosing in case the client borrowed more money than his home is worth. If it happens that your home loses part of its market price with time, the bank cannot demand more money than the market value of your home.
Before you enter the program, you have to pay about $1,300. After a few years' time, the amount of money you had borrowed may be equal to the value of your home you bought using your lifelong savings. If you borrowed $50,000 at the interest of 10%, the loan reduplicates every 7 years. In specific numbers, the loan will equal $100,000 after 7 years and $200,000 after only 14 years. Even if you are lucky and the home price is growing gradually, the debt is growing too and finally there might be nothing left.
Briefly, for home owners who don't have enough money and need to get some in a short period of time, the reverse mortgage might be the right way to go. Differently to the home equity line of credit, your home still remains in your property as long as you live there, and you can get the release mortgage no matter how insufficient your salary might be or how much you owe elsewhere. It is important to acknowledge the fact that the debt multiplies within not such a long time, therefore if the client starts using the reverse mortgage when still young and with insufficient income so that he/she is not able to keep the regular payment schedule to pay off the interest rate, the debt may become close to the total house value, leaving the client with not much financial supply left. If you are interested to find out more about this option, contact your financial planner.