A common conundrum for homeowners is being cash poor, but house rich. I’ve seen it time and again: Clients selling to access the equity in their home due to financial struggles. This is hard when you love your home, know the equity is there, but don’t want to move. The good news is you don’t necessarily have to sell to access your home equity. Here I offer an honest look at reverse mortgages, and the good, bad, and ugly sides of this possibly life-saving option.
What is a Reverse Mortgage?
A reverse mortgage provides a convenient and relatively painless way for you to access the equity in your home. As long as you own your home and are 55 or over, you can receive up to 55% of your home’s current value as a loan. The amount you qualify for is based on your home’s current appraised value, how old you are, and the lender. You pay back the money when you move, sell, or pass away.
The Good
The best thing about the reverse mortgage is that you don’t make payments as long as you live in your home. So you enjoy the money without the need to sell. This is good because you have cash at your disposal to help pay down debt (a bit more about this in the bad), renovate your home so you can age in place, share your wealth with your kids, travel, pay for medical bills – well you get the picture. The good also includes:
- The money is tax-free
- It doesn’t impact your Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
- You can get the money in a lump sum or installments
- There is no “loan-to-value cap” so regardless of your loan balance or home value, you can stay in your home
- It is easier to get approval if you are older, without a source of income, and in need of money
As long as you qualify, you can live in your home, access the cash tax-free, and not worry about loan payments.
The Bad
As good as this sounds, there are, of course, some not so great things about reverse mortgages. The first is that when it comes time to repay the loan, the interest rates will be higher than other types of mortgages, and often other types of loans. The bad also includes:
- You accumulate interest owed while you hold less equity in your home
- There can be higher costs you’ll have to pay with a reverse mortgage compared to other mortgages and loans
- Both you and other owner(s) must be 55 to apply
- You have to pay off and close any outstanding loans secured by your home such as a mortgage or HELOC so a chunk of your reverse mortgage funds will have to go towards this first
One last and very important thing, you can actually face penalties if you want to pay your reverse mortgage back early, so you either pay the penalty or have to continue building interest if you don’t move or sell.
The Ugly
That brings us to the ugly side of reverse mortgages. If you have kids, or plan to leave your home to someone, they can really pay the price. This is because a reverse mortgage:
- Has to be repaid with interest within a set period of time following your death
- It can take longer to settle your estate than the time your beneficiaries have to repay the loan, so they are on the hook to start payments
- There will be less equity left in the home to go to your kids or beneficiaries
From your standpoint, the younger you are, the less money you’ll tend to get. For example, a couple in their 50s with a home value of $900,000 would be eligible for $276,500 to $326,500 while a couple in their 80’s would be eligible for $517,500 – $531,000. While it’s nothing to sneeze at, chances are the younger you are, the more money you’ll need.
Make sure you speak to a real estate agent to understand your home value and the benefits of downsizing. Compare your finances with what you’ll gain or lose with a reverse mortgage to see which option leaves you better off financially. You also have to weigh the ease of staying in your home vs selling and moving.
I am ready to help with a home appraisal and to discuss the pros and cons of selling vs a reverse mortgage. Let’s chat. For more information on different ways to afford a home check out this blog.
Photo by Towfiqu barbhuiya on Unsplash
