What is a reverse mortgage?
In the simplest terms, a reverse mortgage is a loan against the home you own which can be paid to you in monthly installments or a lump sum, depending upon the terms you and your lender agree upon. The difference between this kind of mortgage and a regular mortgage is that with a reverse mortgage you are not obligated to make any loan payments. Instead, interest on the loan is rolled into the original capital that you’ve borrowed.
That means as time passes, the loan amount increases and equity in your home decreases.
The loan must be paid off either when you die or when you move out of the home—whichever comes first. The full amount owing would also have to be paid off if you defaulted on the loan.
Why would I opt for a reverse mortgage?
Lenders that offer reverse mortgages claim that they are a good way to turn some of the value of your home into cash without having to sell it.1 That money might then be used to make home improvements, pay for unexpected healthcare expenses, take a vacation or supplement retirement income.
How old do I have to be to qualify?
It depends on where you live and the lender you choose to work with (some do have different age restrictions). Generally, in Canada and the US, reverse mortgages are available to homeowners ages 55 and up, while in the UK homeowners must be 62 or older.
Are reverse mortgages risky?
Like any loan, they can be.
Always make sure you know the terms of the loan contract, and what could cause you to default on the loan and lose your home—because that’s a worst-case scenario you definitely want to avoid.
There are common ways to default (including using the money from your reverse mortgage for illegal activity, letting your home fall into a state of disrepair that lowers its value, and failing to pay home insurance and taxes), but lenders may also have their own definition of defaulting on a reverse mortgage, so make sure you read the fine print to completely understand your responsibilities.
It’s also important to note that because the entire reverse mortgage amount plus interest must be paid off when you die, you will be leaving less money to any beneficiaries you’ve named in your will. They will also have to pay off that amount in a set amount of time, and if the time needed to settle the estate is longer than the allowed time to pay off the mortgage, it could potentially cause financial issues for those left behind.
What questions should I ask my lender before getting a reverse mortgage?
Always do your homework before making any financial decisions that could impact your future and your family’s future. The Financial Consumer Agency of Canada2 recommends asking your lender the following questions before getting a reverse mortgage:
- How do I get the money from a reverse mortgage?
- Are there any fees I have to pay?
- What interest rate do I have to pay on the money I borrow?
- What can cause me to default on the loan?
- What penalties do I have to pay if I sell my home within a certain period of time?
- How much time do I have to pay off the loan’s balance if I move?
- How much time does my estate have to pay off the loan’s balance if I die?
- What happens if it takes my estate longer than the stated period to fully repay the loan when I die?
- What happens if the amount of the loan ends up being higher than my home’s value when it’s time to pay the loan back?
Speaking of future planning, Foresters Financial members who want to get their affairs in order can take advantage of LawAssure3, a complimentary online document preparation service. LawAssure lets you access customizable wills, powers of attorney and healthcare directives from the comfort of your own home. Find out more by visiting MyForesters.com.
For more information on reverse mortgages, visit Investopedia and the Federal Trade Commission in the US, or The Financial Consumer Agency of Canada.
SOURCES
1 https://www.chip.ca/how-reverse-mortgage-works/
2 https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html
3 LawAssure online document service is provided by Epoq, Inc. Epoq is an independent service provider and is not affiliated with Foresters. Some features not available in Louisiana, US. In Canada, not available in Quebec, the Yukon, the Northwest Territories and Nunavut. LawAssure is not a legal service or legal advice and is not a substitute for legal advice or services of a lawyer. Foresters Financial, their employees and life insurance representatives, do not provide, on Foresters behalf, legal, estate or tax advice.
Description of member benefits that you may receive assumes you are a Foresters member. Foresters Financial™ member benefits are non-contractual, subject to benefit specific eligibility requirements, definitions and limitations and may be changed or cancelled without notice.
420584 CAN/US (04/22)
