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Reverse Mortgage Definition: How It Works ?

Reverse Mortgage Definition: How It Works ?


David Doe

Published in

Real Estate

08 Jan 2022

A reverse mortgage is a loan that offers financial money against the value of your home instead of selling it. This is referred to as "equity release." You can borrow up to 55% of the current value of your home !

The following factors determine the maximum amount you can borrow:

  • The appraised value of your home
  • Your mortgage lender

You repay your loan when you move out of your home, sell it, or the last borrower dies. This means you won't have to pay anything on a reverse mortgage until it's time to pay it off. The longer you go without making payments on a reverse mortgage, you will owe more interest. You may have less equity in your home at the end of your loan term !

Who Can Take Out a Reverse Mortgage ?

You must meet the following requirements to be eligible for a reverse mortgage:

  • Your age should be at least 55 years old
  • A property owner

All people listed on your home's title must be listed on your reverse mortgage application. These people must be at least 55 years old to be eligible. Your lender may also request that you seek independent legal advice. They might demand proof that you got this advice. When you apply for a reverse mortgage, your lender will look at the following factors:

  • Your age, as well as the ages of other people listed on your home's title
  • The state, type, and appraised value of your home
  • The location of your residence

The home you use to get a reverse mortgage has to be your primary residence as well. This usually entails spending at least six months a year in the house !

Working of Reverse Mortgage !

You must first pay off and close any outstanding loans or lines of credit secured by your home before applying for a reverse mortgage. A mortgage and a home equity line of credit are two examples (HELOC). You can do this with the money you get from a reverse mortgage !

The remainder of the loan can be used for anything you want, including:

  • Home repairs or improvements
  • Healthcare expenses
  • Debt repayment
  • Regular bills

Other financing options secured by your home may be limited if you take out a reverse mortgage. You might not be able to get a HELOC or other similar loan. You might be able to get the money from your loan by doing one of the following:

  • taking some of the money now and the rest later
  • receipt of funds in a lump sum

Inquire about your lender's payment options for a reverse mortgage. Also, find out if there are any limitations or fees. How are you going to repay the money you borrowed ? You don't have to make any monthly payments with a reverse mortgage. You have the option of repaying the principal and interest in full at any time. However, if you pay off your reverse mortgage early, you may have to pay a fee:

When you:

  • Sell your home
  • Move out of your home
  • The last borrower dies
  • You default on the loan; you must repay the remaining balance

You could default on a reverse mortgage if you:

  • Use the money from the reverse mortgage for illegal purposes
  • Lie on your reverse mortgage application
  • Allow your home to fall into disrepair, lowering its value
  • Not following any of your reverse mortgage contract's terms

Defaulting on a reverse mortgage may be defined differently by each reverse mortgage lender. Inquire with your lender about the possibility of default. When you die, your estate is responsible for repaying the entire debt. If several people own the house, the loan must be repaid when the last person dies or sells the home. You or your estate may have a different amount of time to repay a reverse mortgage. For example, if you die, your estate may have 180 days to repay the mortgage. However, if you go into long-term care, you may only have a year to pay it back. Ensure to inquire about your lender's repayment schedule for a reverse mortgage !

How Much Can a Reverse Mortgage Set You Back ?

The costs of a reverse mortgage may include the following:

  • If you pay off your reverse mortgage before it's due, you'll be charged a prepayment penalty
  • Legal fees or independent legal advice for closing costs
  • A higher interest rate than a conventional loan
  • A fee for a home appraisal
  • A one-time setup fee

Depending on your lender, the costs will vary. Some fees may be added to your loan balance. Others may require an upfront payment !

What Are The Options For Obtaining a Reverse Mortgage ?

Reverse mortgages are available in Canada through two financial institutions. The Canadian Home Income Plan (CHIP), known across Canada, is offered by Home Equity Bank. A reverse mortgage can be obtained directly from Home Equity Bank or a mortgage broker. In some significant urban areas, Equitable Bank offers a reverse mortgage !

Before taking out a reverse mortgage, shop around and consider your options. Other products offered by your financial institution may be able to meet your requirements !

Compare the costs of the following potential reverse mortgage alternatives:

  • selling your home
  • buying a smaller home
  • renting another house or apartment
  • relocating to an assisted living facility or other alternative housing
  • securing a different type of loans, such as a personal loan, a credit line, or a credit card

Before taking out a reverse mortgage, you should consult with a financial advisor and your family. Make sure you understand how a reverse mortgage works and how it might affect your home equity in the long run !

What To Ask a Lender About Reverse Mortgages ?

Before you apply for a reverse mortgage, make sure to ask your lender about the following:

  • If there are any fees you must pay
  • What can cause you to default on the loan
  • How you can get the money from a reverse mortgage
  • What interest rate you must pay on the money you borrow
  • If you move, how much time do you have to pay off the loan balance
  • Any penalties you must pay if you sell your home within a certain time
  • If you die, how much time does your estate have to pay off the loan balance

A setup fee and a home appraisal fee may be included in the cost of a reverse mortgage. Because taking out one of these loans is such a big decision, it's a good idea to seek professional advice from a mortgage specialist to help you weigh the benefits and drawbacks. If you're looking for a mortgage specialist in Canada, Guglu Homes can help you get the best deal !

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