A reverse mortgage is a financial product that is most commonly used by senior citizens over the age of 65 who wish to create a passive cash flow to supplement their retirement savings. While the reverse mortgage can be an effective way to create a regular payment for you, it can also lead to other problems in the future. This article will define what a reverse mortgage is, outline its characteristics and advise what considerations you need to address if contemplating acquiring a reverse mortgage.

Definition

  • A reverse mortgage is a home loan secured by a mortgage over your home, which provides cash payments based on home equity. Repayment of the loan is deferred until you die, sell, or move out of the home.

Characteristics

  • You will not be required to make monthly payments. If payments are not made, interest is added to the loan’s balance. Therefore debt increases in the case of reverse mortgages.
  • Although the rising loan balance can eventually grow to exceed the value of the home you (or your estate) may not be required to repay any additional loan balance in excess of the value of the home, depending on the terms of your mortgage.
  • You still retain ownership of your home. The reverse mortgage is registered against the title to the property.
  • There are options to ring-fence portions of equity to ensure something is left to pass on to family members, but that reduces the amount that can be borrowed.

 Considerations

  • Set up fees and closing fees can be substantial.
  • Will the passive cash flow be enough to meet your needs?
  • The compounding effect increases the debt significantly and will result in diminished equity in the property.
  • Terms and conditions are complex. Don’t sign anything until you have had your lawyer look over the agreement

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