What Is a Reverse Mortgage?
With a traditional mortgage, money is loaned to a borrower to purchase a home and he/she repays the loan with monthly payments over a set period of time. With a reverse mortgage, a homeowner accesses equity already built up in the home to access a lump-sum or monthly payments from the lender. Reverse mortgages are not required to be repaid as long as the owner and/or his/her spouse remains in the home. At such a time, the entire amount is repaid to the lender, usually with the proceeds from the sale of the home.
This type of loan is generally intended for those who are either retired or close to retirement, and who will be looking to sell their home at the end of the loan period. In order to qualify for a reverse mortgage, an individual and his/her spouse most both be at least 55 years old. As well, the property in question must be either entirely owned or almost entirely owned by the borrower.
Several different options are available for receiving a reverse mortgage. In a “term” option, a fixed monthly payment is distributed for a specific amount of time. In a “tenure” option, a fixed monthly payment is made for as long as the owner lives in the home. In a “line of credit” option, the owner can retrieve any portion of the qualifying amount at any time, limited only by using the entire amount of equity. Financial institutions are usually willing to agree to a combination of monthly payments and a line of credit.
Reverse mortgages can be advantageous in several different ways. If a homeowner is looking to make home repairs or pay off the original mortgage, a reverse mortgage can assist. Disbursements through a reverse mortgage are considered non-taxable income, so the full amount is given directly to the homeowner. Because earnings from a reverse mortgage aren’t taxable, they don’t count towards eligibility for pensions and other funds.
Reverse mortgages are useful tools, but they aren’t suitable for everyone. The best way to determine whether you could benefit from a reverse mortgage is by consulting your mortgage broker.