• How Does A Reverse Mortgage WorkHow Does A Reverse Mortgage Work?

    A reverse mortgage is like any other mortgage in the sense that is secured against your home. That means that the bank lends you money and uses your home as security or collateral, if you will. The mortgage that we are all familiar with involves making regular payments, a portion of which goes towards interest, and a portion of which goes towards paying down the balance.

    That’s how a regular mortgage works. But I haven’t answered the most important part of the question “How Does A Reverse Mortgage Work” which lies in the word “Reverse”.

    What Makes It “Reverse” Then?

    The “reverse” part of the mortgage lies in the fact that the reverse mortgagor does not make payments. This is why the reverse mortgage lender will only lend up to 55% of the value of the home. Their interest payments will be collected from the remaining 45% when the homeowner sells, moves or (sadly) passes away. How Does A Reverse Mortgage Work? The interest compounds and the mortgage amount increases over time, rather than decreasing like a conventional mortgage. So, when the homeowner gets the reverse mortgage, they may have 45% equity in the home. When they sell or move, after the reverse mortgage compounds for years, they may only be left with 30% equity. But there’s something that we haven’t considered…

    Your Home Is Expected To Appreciate In Value

    The example above where the reverse mortgagor is left with only 30% equity is actually misleading. The likelihood is that the home will appreciate in value while the interest is compounding. So they might be left with 35% equity OR (in very strong real estate markets like Vancouver), they may break even and remain with the original 45%  or more!

     Why Would Anyone Want To Do This?

    Two words: cash flow. That is usually the main reason. The reverse mortgagor is typically a pensioner with a very limited income and is sitting on a goldmine of equity in their home with no way to access it. They could get a regular mortgage or a home equity loan or home equity line of credit, but all of those loans require them to qualify , that is, have sufficient income, which is the one thing they DON’T have.

    What’s The Catch? There Is One And Don’t Let Anyone Tell You Otherwise

    Once you truly understand How Does A Reverse Mortgage Work, you will realize that there is a catch. We’re not going to lie. The big catch is that you pay a higher rate than a regular mortgage, sometimes 2-3% or more. The question is: why? The reason is because the bank has to wait for their money for a very long time. You pay a premium for that. With a regular mortgage, they start receiving interest payments a month later. With reverse mortgages, they have to wait 5 year or more. Is it worth it? Sometimes. That’s what we are here for. We help you decide.

    Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215.

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