What is a reverse mortgage, and is it right for you?

What is a reverse mortgage? If you’re 55 or older and own your home, you may have asked yourself this question. A reverse mortgage can be a valuable financial tool, but of course, it’s not right for everyone! In this post, we walk through what a reverse mortgage is, how it works, its pros and cons, and how to know if it might be the right fit for you.

What is a reverse mortgage?

A reverse mortgage is a loan that allows home owners aged 55 and older to access up to 55 per cent of the value of their home in tax-free cash, without having to sell the property or make monthly mortgage payments. Unlike a traditional mortgage where you make payments to the lender, with a reverse mortgage, the lender pays you—either as a lump sum, monthly payments, or a combination of both. The loan is repaid only when you move out, sell the home, or pass away. 

How does it work?

So, how does a reverse mortgage operate? First, you must be at least 55 years old to qualify, and your home must be your primary residence. The amount you can borrow depends on your age and the value of your home. The more your home is worth, the more you can borrow. You don’t make any payments on the loan as long as you’re living in your home. Instead, interest accumulates on the loan, and the total balance is repaid from the sale of your home when you move or pass away. Most importantly, you still own your home. You’re only required to keep the home in good condition and pay your property taxes and insurance.

You can use the funds from a reverse mortgage however you like. Some common uses include boosting your retirement income, taking on home renovations or repairs, and paying off existing debts. For many retirees, a reverse mortgage can help them age in place comfortably, without the stress of selling or downsizing.

Pros of a reverse mortgage

A reverse mortgage has plenty of advantages. Perhaps the largest draw is the fact that there are no monthly payments. It frees up your monthly budget entirely. The money you receive isn’t considered income, so it won’t affect things like your Old Age Security (OAS) or Guaranteed Income Supplement (GIS). Another advantage is not needing to relocate. You don’t need to sell or move out, which can be a huge emotional and practical benefit. 

Cons of a reverse mortgage

Of course, a reverse mortgage has some drawbacks as well. Although home owners do not need to make monthly payments, the total amount owing can grow quickly over time. This is because interest accumulates on both the principal and the growing interest itself, which can come as a bit of a shock. You should also expect to encounter some additional fees to get the process started. Expect to pay for an appraisal, legal fees, and a setup fee. These costs can add up to around $3000. Finally, a reverse mortgage is not great for short-term needs. If you’re planning to move or sell your home within a few years, a reverse mortgage may not be cost-effective for you.

A reverse mortgage can be a powerful financial solution for the right home owner. The key is to understand the full picture, including how the loan affects your long-term financial goals, estate planning, and quality of life. If you’re curious whether a reverse mortgage might be right for you, feel free to reach out. We’re happy to walk you through your options!

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.