Investor Financing

Finance Corner: Reverse Mortgages

Finance Corner: Reverse Mortgages
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A reverse mortgage is a loan that you can borrow based on the equity you’ve invested in your home. You can use this money however you want, including as a way to help finance other property purchases. Reverse mortgages are only available to borrowers aged 55 and older, so they’re a great way to launch a new career in real estate investing as retirement approaches.

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Reverse mortgages explained

A reverse mortgage, sometimes known as an equity release, allows you to take out money from the equity you have in your property without selling your property. With a reverse mortgage, you can borrow up to a certain percentage of the property’s current value. How much you can borrow depends on factors such as your age, your property’s appraised value and your lender.

Unlike a home equity loan, you don’t need to make repayments until the loan is due. The loan is typically due when you vacate your home, sell the property or the last borrower dies. While payments are not required until the loan is due, you will owe more interest the longer you wait to make payments. This will drain the amount of equity you have in your home.

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Qualifying for a reverse mortgage

Reverse mortgages are only available to people age 55 or older. If your spouse’s name is on the property, you both need to be listed on the reverse mortgage application. Both applicants must be at least 55 years old.

Additionally, the property you’re using for your reverse mortgage must be your primary residence. To be a primary residence, you must live in the home at least six months out of the year.

If you have a mortgage on your house, you must pay the remaining balance when you receive the reverse mortgage. You can use the money from the reverse mortgage loan to pay any mortgage, lien or debt against your house.

In addition to meeting your eligibility requirements, a lender will also consider your property. The lender will want to know about the home’s condition, type, location and appraised value. Current market trends will impact how much your home is deemed to be worth and in turn your loan amount.

The amount of money you could receive depends on not only the appraised value of the home but also the how much equity you have. Generally, the longer you have owned the home the more money you can get.

In some cases, your lender may also ask you (and your spouse) to prove that you have received independent legal counsel. There are financial implications that affect not only you but also any family members, as your heirs could be responsible for repaying the balance and may not inherit the property. A responsible lender will want to ensure that you understand how a reverse mortgage could affect your estate.

Accessing your funds

There are different ways that you can choose to receive your loan:

Lump sum

Receive your entire loan at once upon closing. This allows you to secure a fixed interest rate.

Equal monthly payments

The lender will make regular payments for as long as at least one borrower uses the home as a principal residence.

Term payments

The lender makes regular monthly payments for a set period, e.g. 10 years.

Line of credit

The borrower can use money as needed and only pays interest on the amount borrowed. This option functions more like a credit card than a loan.

Monthly payments/term payments plus a line of credit

When borrowers add the option for a line of credit, they can receive their regular monthly payments while keeping the option to borrow more money against the line of credit if needed.

Each lender is different, so it’s important to ask what loan terms are available for receiving your funds.

To access your money, you must first close any outstanding loans or lines of credits secured by the house; however, you can use the money from the reverse mortgage to do this. You may not be able to take out loans secured by your house in the future, such as a home equity line of credit (HELOC) if you have a reverse mortgage.

Reverse mortgages can be used to pay for anything you need. You can improve your current home, pay off personal debts, cover health care costs or use it as an additional source of income.

Repaying your reverse mortgage

It’s not necessary to make regular payments on a reverse mortgage. You will continue to be charged interest until the loan is repaid in full. You have the option to pay off the principal and interest in full whenever you wish; however, some lenders may charge you a fee if you pay off your reverse mortgage too early.

If you decide to sell your house or if it is no longer your primary residence, you’ll need to repay the remaining balance on the loan. You will also have to repay your loan if you default. The lender sets the terms for what causes default. Common examples are being dishonest on the application, using the money for anything illegal and letting the house fall into disrepair.

Using a reverse mortgage to buy another property

You can use a reverse mortgage to invest in another property. The money from the reverse mortgage can help you with a down payment on another house. This might be a house that you plan to move into upon retiring, a vacation home or an investment property.

To remain in good standing with your reverse mortgage, the home that you borrowed against must remain your primary residence. You can buy an additional property that you rent for half the year while you live in your primary residence. You can also use the funds to get the 20 percent down payment needed to buy an investment property.

Reverse mortgages allow you to access the money you’ve already invested to relieve financial stress or generate more income. If you meet the eligibility requirements, consider talking to a lender about how you can use a reverse mortgage to build greater wealth.

How to get started with a Reverse Mortgage?

We recommend you call our partners at LendCity Mortgages for a Reverse Mortgage. They have a few lenders that provide Reverse Mortgages across Canada. They can be reached at 1-519-960-0370.

Reverse Mortgage Explained Pros and Cons

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