2023-08-09 23:30:00
A reader sent us a pertinent question regarding reverse mortgages. It will interest many retired baby boomers who are in the same situation.
QUESTION
“We are a retired couple, owners of a house valued at $900,000. During construction, the financial institution authorized a mortgage of $400,000 along with a home equity line of credit. Today, our mortgage balance is $280,000. So we have a net worth of $620,000 ($900,000 – $280,000).
“I contacted the financial institution we have been dealing with forever to explain to them that we are retired and our income has decreased, but that we would like to keep our house for as long as possible using the accumulated equity, because we have no children and don’t want to leave anything behind. Their response was simply to use the balance of the margin, ie $120,000 ($400,000 – $280,000), adding that our income does not allow us to refinance.
“In other words, the only way to use the equity would be to sell the house once we hit the maximum margin of $400,000, which we don’t want to do. I heard that some financial institutions allow reverse mortgages. How does it work? Is this the right thing to do?”
ANSWER
Reverse mortgage, what is it?
It involves turning the equity in your home into cash while continuing to live there. Depending on the lenders, the loan can reach from 55% to 59% of the equity. To be eligible, you must:
· be at least 55 years old;
· own and occupy.
How’s it going?
· The lender granting the reverse mortgage pays off the mortgage, margins and outstanding loans. He becomes the first ranking creditor.
· It pays the balance to the borrower in a single lump sum payment or in installments, depending on the borrower’s needs.
· Amounts received are tax-free and do not affect Old Age Security or Guaranteed Income Supplement benefits.
And the refund?
· The borrower does not have to repay the new mortgage on a regular basis. This becomes payable when:
o he sells the house;
o he is moving;
o on the death of the last borrower.
However, he must continue to pay:
o property taxes;
o regular maintenance;
o renovations.
How much does it cost?
In order to determine the cost of the reverse mortgage, several elements must be taken into consideration:
· Higher interest rate than a traditional mortgage;
· File opening fees: approximately $1,000;
· Assessment fees: from $250 to $450;
· Penalties for early repayment;
· Closing costs such as legal fees and independent legal advice.
Conclusion
Since you still have $120,000 available on your mortgage margin, use it to the maximum. On the one hand, you will delay the use of the reverse mortgage whose interest rate is higher than that of your current margin and on the other hand, the value of your house will continue to increase. In other words, there is no rush. If necessary, renew the mortgage that expires in one year and during this time, use your margin as little as possible. When this has reached the maximum, you will consider the option of using the reverse mortgage. But that’s only as a last resort. This way you will get the most value from your home. Good retirement!
Advice
Consult a financial adviser: Important financial decisions, such as obtaining a reverse mortgage, should be made with the help of a professional. Budget: Even with the extra cash from a reverse mortgage, it’s still important to budget and plan your spending.
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