Reverse mortgage: are you considering it? Even thought I’m no financial advisor, as I’ve been realtor in Toronto for many years, every day I deal with people who know somebody that just got or is considering to take this financial product. Reverse mortgage is a unique kind of house loan that gives you the opportunity to get a part of the value of your house in cash.
This financial product may be also called “Equity Release”, as in England, where it is quite popular. The target group for this financial product is people aged 60 or more, who could use some more money, but the monthly payment schedule is not suitable for them.
?
Basic rules
?
The reverse mortgage means that you can get the money for the cost of your house and it gathers interest with time. You don’t have to worry about paying the money back, because it can wait only after you sell the house. This means that in the meanwhile you or your spouse can still live there, until you leave for a retirement home or until your death comes. Typically, clients can take credit ranging between $20,000 and $500,000. It should not exceed 30% of the house value, or 40% if the client is over 70. Now we will discuss the basic benefits and drawbacks of this financial product.
?
Ups
?
No taxes included. Your budget is not influenced with any monthly payments. The house is still in your possession. It is a good way of paying back your previous mortgage or any other debts you may have, while you don’t need to worry about the monthly payments any longer. If you don’t want the debt to get any bigger, you may pay the interest little by little. If the client decides to mortgage another house in his ownership (partly or fully), it is possible. If you decide to leave this programme, you may do so at any time. No fees are charged, on the condition that you have been participating for at least 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 house is worth. The bank is not allowed to charge more than the rightful price of the house, actually even if the property gradually has lost part of its value.
?
Drawbacks
?
The initial charge is about $1,300. It can happen that in a couple of years only, the credit is quite likely to be as big as your lifelong property value. 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 house price is growing gradually, the debt is growing too and finally there might be nothing left.
?
To sum up all written above, the ideal clients for the reverse mortgage are owners of a house without adequate salary who could really use getting some cash within a short time. In contrast to the “classic” mortgage, it is not important how much you earn or what other debts you have, and when you still live in your house, you cannot lose its ownership. One of the risks of the reverse mortgage may be that if used by a considerably young client who is not able or willing to pay off the interest rate regularly, it may become very costly, as the amount borrowed increases with time and growing interests, leaving the borrower with very little or no house value left. If you are interested to find out more about this option, contact your financial adviser.
Entries (RSS)