Pros and Cons of a Reverse Mortgage

A reverse mortgage is a way for homeowners to access some of the value of their home for use today, while still retaining ownership of their home. It is important to understand pros and cons of a reverse mortgage if you are considering one.

 Pros Of A Reverse Mortgage – Advantages

  • There are no income or credit requirements
  • Advances from a reverse mortgage are 100% tax free
  • You may spend the money anyway you wish
  • No payments are required over the life of the mortgage unless you choose to move or sell
  • Stay in your home with no exceptions
  • You can never owe more than what your house is worth
  • Save on realtor fees, moving expenses and reduced headache from possible downsizing
  • Reduced chance of injury, illness, and stress to seniors because of moving to a new, unfamiliar home

Now, let’s take an opportunity to look at the cons of a reverse cons mortgage

Cons of a Reverse Mortgage – disadvantages 

The following three points are the key ones to keep in mind when looking at the cons of the pros and cons of a reverse mortgage

  1. Moving out of your home becomes more difficult.Many people believe that they will lose their home with a reverse mortgage, but in fact the exact opposite is true. Having a reverse mortgage registered on your property makes it more difficult for you to leave your home. If you decide to move or sell you must also discharge a mortgage as part of the process of moving, just like traditional mortgages or a home equity line of credit.
  2. A reverse mortgage is still a loan.Even though you are not required to make any payments while you live in your home, a reverse mortgage is still a loan. Like all other loans, a reverse mortgage is subject to interest that compounds over time. If you review the pages above, we have showed you that a modest growth in equity can easily offset the interest accumulated on the property over time.

Let’s take a look at interest rates. Here is how reverse mortgages compare to other types of loans:

 

Higher Interest Rates

Lower Interest Rates

 
Payday Loan
Credit Card
Private Mortgage
Loan
Unsecured Line Of Credit
Reverse Mortgage
Secured Line Of Credit (HELOC)
Traditional Mortgage

What are reverse mortgage rates anyways? link to: current reverse mortgage rates.

You can see that compared to the range of loan products available, a reverse mortgage generally has more affordable rates. It sits just slightly above the rates you would find with a HELOC, which we will discuss later.

Keep in mind, compared to the other types of loans that are available, a reverse mortgage is the only one where regular payments are not required.  For that privilege it makes sense that the rate on a reverse mortgage would be slightly higher than both a secured line of credit and a traditional mortgage.

  1. The size of your estate will be reduced.
    Once you start spending some of the equity in your home, a reverse mortgage overtime will reduce the size of your estate. But as covered earlier, the home will also likely go up in value, therefore not dramatically decreasing the inheritance you wish to pass on to your family.

As mentioned before, 99% of Canadians who took out a reverse mortgage still had equity when they sold their home. If leaving a legacy for your family is important to you; It would be very unlikely for your estate to reduce to zero.

Your home and the inheritance that you will leave with your family will always be your decision. Nonetheless a discussion with your family is important to have. Getting a reverse mortgage is a big decision, so discussing it with the people who may be affected is a wise thing to do. But at the end of the day the decision is yours.

Click here to go to an article by The Globe And Mail article about pros and cons of a reverse mortgage for further reading.