When many people think of mortgages for seniors, the one that first enters their mind are reverse mortgages. Reverse mortgages can either be a godsend or a disaster waiting to happen, depending on who you speak to. So what are these mortgages? And are they really a good borrowing technique? Like all mortgage products, it depends on your own needs, and your own situation.
A reverse mortgage in Ottawa is a very specific mortgage product geared towards homeowners who are 55 years or older. After a person is approved for a reverse mortgage, no payments at all are due, not even interest, until the end of the life of the loan. This amortization period will be when the homeowner sells their home, or it is no longer considered to be their primary residence. It’s only when that amortization period is up that any principal that was borrowed, along with all interest that’s been accrued over the life of the loan, will need to be paid back.
How much can a person borrow with a reverse mortgage? Up to 50 per cent of the current value of their home, if they have the equity to back up that loan. This amount can be drawn out in a lump sum such as a home equity loan; or they can be used as a steady stream of extra income, very similarly to a HELOC. As you withdraw more from the loan, the equity in your home will decrease.
That reduction of equity in your home is one of the biggest drawbacks that comes with a reverse mortgage. While tapping into this equity can be a great financial solution for some, others will need to carefully evaluate whether or not it’s wise for them to borrow against it. There’s also the possibility that the estate could become the family’s responsibility and if there is a large amount of debt held against it, that could be another financial burden.
Because there are no payments due to the lender during the life of the loan, reverse mortgages also carry a higher interest to offset that risk. This high interest is another disadvantage that comes with reverse mortgages.
Those that are undecided whether or not a reverse mortgage is for them need to weigh the advantages with the disadvantages and compare them with their own situation. They’re not for everybody but for those in the right situation, they could be just the right solution.
