You did your best to plan for your future, but health concerns have introduced new bills that you did not expect. Expenses are piling up and your retirement savings are quickly being depleted. You are growing concerned that the comfortable lifestyle you earned through hard work will soon be coming to an end. What can you do?
Selling your house is an option, but you would still need to find a place to live. How much cheaper will a new place be? What level of comfort would you be giving up? How far away will you have to go? Most importantly, what if you love your current home? Perhaps taking out another mortgage is suitable. The money you receive could support you as you continue to age in your home. Though a new mortgage means another monthly expense that you have to worry about.
An option that addresses both of these concerns is a reverse mortgage.
A reverse mortgage allows you to continue to live in your home, while a lender pays you a loan amount. This allows you to tap into the equity of your home and enjoy the comfort of living in it. No monthly payments are required.
You want to be sure that you fully understand the advantages and disadvantages of a reverse mortgage before choosing it to help with current expenses and maintain your lifestyle. We will explore the pros and cons of this loan agreement to help you make the best decision that suits your needs.
The Pros of Reverse Mortgage
You get paid to stay in your house.
Many people treat the purchase of a house as an investment. This is often wise, as property values have a great appreciation rate. However, it is also a very illiquid investment. It can take considerable time and effort to cash out on your property. Plus, after making it a home, many people do not want to sell. An emotional attachment draws you to remain at the property where you made so many memories with your family.
A reverse mortgage allows you to access the equity in your home without forcing you to leave. One of the rare occasions that you can have your cake and eat it too.
You have no obligation to make any payments.
How can there be no obligation if you are getting a loan? Of course the lender will not be giving you free money. The amount you are loaned out will be charged interest. But you can choose to simply allow the interest to accrue, and not make any payment until you are required to settle the loan when you sell the house or pass on.
The no obligation period remains in effect for as long as you and your spouse remain in the house as your primary residence. This is the primary advantage of this type of loan compared to a typical mortgage that requires you to make monthly payments.
The loan due will not exceed the value of the house.
No matter how much interest collects on the property, you will never pay more than the value of the house. This protects any other assets you have from being taken if there is a market crash or some other worst-case scenario occurs that drops the value of the home.
If you do decide to sell the house, you would pay however much the total of the loan is, and keep the balance. If you remain in the home until you and your spouse pass on, then your inheritors will have the option to repay the loan if they want to keep the property or have it discharged through the sale of the house. They have the same protection as you do in not having the loan amount exceed the value of the house.
You can use the money for any purpose.
There is no requirement that you use the money you receive on home renovations or on any other specific thing. Want to be able to take more vacations? Start planning your trip to South Asia. Want to take a course on puppetry? Start stretching those finger joints. Need to pay for health care as you age in your home? There’s an app for that.
Perhaps you like the idea of having some control over how your heirs’ use their inheritance. A reverse mortgage will allow you to see firsthand the good will that your money can have in the lives of your loved ones. You could use the money to pay the university tuition of your grandchildren. Or maybe a family member needs help to start a business.
One of the most compelling reasons for considering a reverse mortgage will be health care expenses. You should not be forced to choose between staying in the environment you call home and affording quality caregiving. This new capital inflow could allow you to rely less on family members for help. Skilled professionals with years of experience helping people with your health condition can enhance your quality of life.
You can make penalty free repayments.
Usually when you receive a loan that has a low interest rate, such as a mortgage or an auto loan, there are penalties for paying off the loan early. With a reverse mortgage, you have the flexibility to pay the loan off if your situation changes.
The money you receive will be tax-free, as it is not counted as income.
Flexibility of withdrawal
There are three ways you can receive the money:
- One lump sum payment
- Monthly instalments
- Line of credit
With a lump sum payment, interest is charged on the full amount immediately. Monthly instalments are paid out for as long as you or your spouse is still alive and occupying the property as the principal residence. A line of credit allows you to only withdraw what you need as you need it. This is the most flexible option.
Cons of Reverse Mortgage
Lose equity in a resource that could help in an unexpected event.
Something to keep in mind is that you will be significantly lowering the value of your home by taking out a loan against it. The interest that is charged will add up quickly if you elect to not make any payments. This removes what is likely your most valuable asset as an option if a serious event occurs.
While you may want to live in your home as you age, a situation may arise where you would need to move somewhere else. Your equity in your home may be significantly lowered by then, making it difficult to have enough money for new living accommodations.
This is mainly a concern if you are choosing to use the money for wants rather than needs. If you are already facing hardship due to health care costs, then your situation is already serious.
Those you leave behind have less to inherit.
One of the reasons why you worked so hard was to provide a comfortable life for your family. Many wish to continue providing when they are gone by leaving their loved ones an inheritance. As a house is often the largest asset of an estate, this would make up the majority of an inheritance. A reverse mortgage significantly lowers the value of this asset.
One heir you will not have to worry about is your spouse. Both you and your spouse will be covered under the terms of the reverse mortgage providing that you both qualified in the initial agreement.
Must continue to pay property taxes, insurance, and keep the home maintained.
If you fail to pay the property taxes or insurance fees then you will breach the contract, and the house may be foreclosed on. The lender also has an interest in the house keeping its value, as it is the only asset that they can use to recover the loan amount. Thus, maintaining the house is necessary. This does not mean that you have to obsess over every creak your floor makes. But larger issues, like a roof that leaks, need to be attended to before they become more serious.
High interest rates
The interest rate for a reverse mortgage will vary, but is higher than a typical mortgage. The average rate for the month of December 2016 was 4.89% for fixed and 4.68% for adjustable.
Additional Points of Interest
There is some other key information that you should be aware of when considering a reverse mortgage:
- You need enough equity in your home to qualify
- You should only have a small amount left owing on your mortgage if you still have one
- You should be able to access 80% of the equity you have in your home
- Certain types of properties do not count
- The house must be your principal residence
- You cannot have a reverse mortgage on a rental or vacation property
- You must be a certain age
- Federal law requires that you be at least 62 years old
- You keep ownership of the property
- It is a myth that the lender of a reverse mortgage becomes the owner of the house
A reverse mortgage is a great opportunity for many people who need access to the value of their home. Taking out a second mortgage and selling your home involve compromises that you may not be willing to make. Only you will be able to decide if this is the right choice for your situation. But do consider this option if the cost of caregiving is worrying you. Living in the comfort of your own home while being taken care of by professional caregivers is a luxury that every hard working person deserves.
Note: While most of the information applies to both Canada and the US, we used US numbers for interest rate, and age requirements.
REQUIRE HOME CARE FOR YOUR AGING PARENT(S)?
Selecting the right caregiver for your aging loved one can be tough. We help families like yours to the right type of care and find the best possible caregiver for your needs. Fill out the form below and we'll get back to you as soon as we can.