The reverse mortgage is a popular offer for people who are halfway through the payment of their home loan. It’s another loan that enables property owners to retrieve the unencumbered value of their current home. It’s taking the equity of your home and converting it into cash that you can use.
A reverse mortgage allows you to stay at your home, enjoy your money now while you maintain your financial freedom. All these while your home’s value appreciates over time. Before you jump into this option, though, you have to know the pros and cons of applying for this mortgage.
The Advantages of a Reverse Mortgage
If you’re thinking of applying for a reverse mortgage now, and your application has been approved, here are some of the benefits you can enjoy:
- Tax-free income: The payments you’ll receive from the reverse mortgage would not incur any tax. Therefore, your OAS (old-age security) and GIS (guaranteed income supplement) benefits won’t be affected.
- No monthly payments: It depends on the setup you’ll seek during your application process, but you have an option to eliminate the monthly payments. It will allow you to use your budget to other more important things.
- No repayment needed: As long as you stay in your home, you don’t need to repay your reverse mortgage. That is until you decide to sell your home or when you or your partner passes away.
- Pay any time: It is up to you when you decide to pay up your mortgage.
- Safety net: When you are under a reverse mortgage, your loan value will never surmount the value of your property. Moreover, if there is any shortfall in terms of interest rates or house value, you and your beneficiaries will not be responsible for any effect it will bring.
- Fund flexibility: You can receive your fund depending on your provider. It can be as a lump sum, a regular payment, or a combination of the two.
- Tax-deductible interest: If your proceeds from the interest paid on the reverse mortgage are used to earn investment income, such as interest or dividends, it will be tax-deductible.
- Fill the gap during investment emergencies: In case the investment market experiences a downturn, your reverse mortgage can act as a filler until the market stabilizes, or until your investment reaches its maturity.
The Disadvantages of a Reverse Mortgage
Since approval for reverse mortgages is a case-to-case basis, they may come with disadvantages, too. After all, no offer is perfect. Here are some of the disadvantages you should know:
- Watch out for the interest: While your home may increase in value to help offset some of the interest cost, the interest itself could accumulate with the amount you borrow over time.
- Added risk: When money lenders offer you a reverse mortgage, they usually position it as a method to increase your savings. However, that happens through transferring your wealth from your home to your investments. While it can be effective, it is also an additional risk.
- Various factors affecting the amount you get: There is no specific formula for getting the total amount you can borrow through a reverse mortgage. It will depend on various factors, such as your age, gender, your current debt, the location of your home, and the type of housing you own.
- More costly for starters: A reverse mortgage has startup fees and higher interest rates. That makes it a more expensive route compared to other conventional methods of loans and the standard mortgage.
Shannon Christenot for Reverse Mortgages
Every offer has its pros and cons, and a reverse mortgage is not an exemption. Instead of being discouraged, remember that your application result is a case-to-case basis. Now that you know the positive and negative situations it could bring, it can help you gauge which among the two are more valuable for you. Finding a trusted mortgage broker can also help you secure more of its advantages.