Today I’d like to present you with some pros and cons of Reverse mortgage. I’m no financial advisor, but being a Toronto realtor for years, I’ve met many people that used or wanted to use this financial product. One of the house loans available is called “reverse mortgage”. Using this product, you can get the money according to the price of your house.

This financial product may be also called “Equity Release”, as in the UK, where it is quite popular. The typical client using the reverse mortgage is a person over 60 years in need of some more cash, not willing or not able to keep the monthly payment schedule.

Basic rules

The reverse mortgage means that you can get the cash for the value of your house and it gathers interest with time. The client or his/her spouse is allowed to stay in their house as long as needed, since the debt has to be paid back only after they sell the house or the client (or spouse) moves out or passes away. Usually, you can gain between $20,000 and $500,000 up to 30% of your home equity. If you are older than 70, the maximum is set to 40% of the home price. The next paragraph explains the main ups and downs of this way of getting money.

Ups

The mortgage is tax-free. You don’t have to pay any monthly amount. The ownership of your home does not change. This is an excellent option for people whose house is mortgaged or who have other liabilities to pay, and who want to remove the regular payments from their budget. There is a possibility to pay the interest gradually, so that the loan amount stays the same. 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 home is worth. The bank is not allowed to charge more than the rightful price of the home, actually even if the home gradually has lost part of its value.

Downs

Before you enter the program, you have to pay 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. In case the interest rate equals 10% and the initial loan was $50,000, the debt amount doubles once in every 7 years. That means you will owe $100,000 after 7 years and $200,000 after 14 years. In many cases the loan value swallows all the home price, even if the home value grows with time.

If we recap what we said before, the equity release is a suitable financial product for people who need to get some money in a considerably short time, who own some property and don’t have sufficient regular funding. One of the specifics of this kind of loan is that as long as you stay in your house, its title still remains in your name. Even people who don’t have sufficient income or have other financial responsibilities may use the reverse mortgage. One of the risks of the reverse mortgage may be that if used by a considerably young person 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.

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