On the surface, reverse mortgages seem like the ideal solution for cash-strapped seniors. At age 55 you can tap the equity in your home up to 55 per cent of the property value; you don’t have to make any interest or principal payments, and the mortgage only comes due when you die, sell your house or move out permanently.
As more boomers hit retirement age, reverse mortgages are growing in popularity but is it the best option for seniors?
How it works
With a conventional mortgage, you borrow a certain amount and gradually pay it back. Not so with a reverse mortgage. The lender advances you a lump sum (or provides the money in stages) and you make no monthly payments. As a result, the accrued interest is added to the loan balance, and the mortgage steadily grows, while the equity in your home decreases. You can use the proceeds from the advances for whatever purpose you choose. There is the added advantage not needing a specific income to qualify. The lender is only concerned about the location, equity in the home and your ability to maintain it, by paying utilities, property taxes, etc.
There’s always a downside
On the downside, interest rates on reverse mortgages are higher than those on traditional mortgages or secured credit lines, perhaps as much as double over these other options. This rate premium can have a major impact on the cost of borrowing over time.
A better option
That is why we recommend a secured line of credit for seniors that equates to up to 65 per cent of the property value, for those who have the income and credit rating to qualify. As with the reverse mortgage, with a secured line of credit, you can borrow a lump sum or access the money in stages as you need it. The line of credit does involve a minimum monthly payment but since you can borrow funds up to your limit, you effectively can borrow against the line to make your monthly payment. There will likely be less cost to both enter and exit a secured line of credit, should you ultimately decide to sell the home.
Get good advice from an experienced mortgage broker
Reverse mortgages may be a good option in the absence of alternatives, but an experienced mortgage broker will provide you options so you can make an informed decision.