Bad habits: Left-overs from a lifetime with traditional forward mortgages...
Posted by PJ Wade at 2/5/2012 5:22 PM 
Categories: Continuing Education and Presentations, Home Equity Management
Categories: Continuing Education and Presentations, Home Equity Management
Don't let misunderstandings and misconceptions about traditional mortgages make understanding reverse mortgages even harder. Don't apply what you believe to be true about traditional mortgages to reverse mortgages until you verify that you do have everything right.
• Interest Rates
Interest rates matter, but contract terms and conditions may matter more. Borrowers of traditional mortgages focus on 1/4% differences in rates and overlook often-costly terms and conditions in the mortgage contract. These typically favour the lender and can render small rate differences immaterial in reducing the cost of a traditional mortgage over its life of 10 to +25 years.
Best Friend Tip: Always ask for the total cost of borrowing, at the beginning, over the decades ahead, and at the end—in writing. This is important with forward and reverse mortgages.
Worst Enemy Tip: Since the reverse mortgage will be arranged for a series of renewable three to five year terms, understanding exactly how interest rates are recalculated at the end of each term and the start of the next is essential. Assumptions are your worst enemy.
• Monthly Payments
The emphasis on affordability of monthly payments (which largely represent repayment of principal and payment of interest due), compounded by the years of repayment involved with traditional mortgages, can distract borrowers from the over-all cost of the money they first borrowed. That is, borrowers often pay two or three times the original principal before the traditional mortgage is retired.
Best Friend Tip: Calculate the total cost of your last traditional mortgage so you have a frame of reference for projections of total debt for a reverse mortgage. Frequency of compounding is the debt-building accelerator.
Worst Enemy Tip: Reverse mortgages work best when they are the financial tool that allows a property owner to stay in the property they absolutely must live in. If moving is a possibility, the cost of a reverse mortgage may make staying an overly expensive alternative.
• Lenders Face Risk
Traditional mortgage lenders are covered by mortgage lender insurance to protect the lender from the risk of the borrower's default, that is the borrower breaking the mortgage contract and not repaying the mortgage debt. That, plus competition for mortgage borrowers, keeps traditional mortgage interest rates lower than those offered for reverse mortgages, where lender competition and risk-eliminating lender insurance do not exist in Canada.
Best Friend Tip: Negotiate, negotiate, negotiate.
Worst Enemy Tip: Before signing, ask the lender for a written list, with specific details, of the circumstances that could put the mortgage in default and call the debt due and payable. For instance, not keeping property taxes or insurance up to date, or renting out the home are typical default triggers.
For more details, read..." Reverse Mortgages: Best Friend, Worst Enemy...Your Choice! "
• Interest Rates
Interest rates matter, but contract terms and conditions may matter more. Borrowers of traditional mortgages focus on 1/4% differences in rates and overlook often-costly terms and conditions in the mortgage contract. These typically favour the lender and can render small rate differences immaterial in reducing the cost of a traditional mortgage over its life of 10 to +25 years.
Best Friend Tip: Always ask for the total cost of borrowing, at the beginning, over the decades ahead, and at the end—in writing. This is important with forward and reverse mortgages.
Worst Enemy Tip: Since the reverse mortgage will be arranged for a series of renewable three to five year terms, understanding exactly how interest rates are recalculated at the end of each term and the start of the next is essential. Assumptions are your worst enemy.
• Monthly Payments
The emphasis on affordability of monthly payments (which largely represent repayment of principal and payment of interest due), compounded by the years of repayment involved with traditional mortgages, can distract borrowers from the over-all cost of the money they first borrowed. That is, borrowers often pay two or three times the original principal before the traditional mortgage is retired.
Best Friend Tip: Calculate the total cost of your last traditional mortgage so you have a frame of reference for projections of total debt for a reverse mortgage. Frequency of compounding is the debt-building accelerator.
Worst Enemy Tip: Reverse mortgages work best when they are the financial tool that allows a property owner to stay in the property they absolutely must live in. If moving is a possibility, the cost of a reverse mortgage may make staying an overly expensive alternative.
• Lenders Face Risk
Traditional mortgage lenders are covered by mortgage lender insurance to protect the lender from the risk of the borrower's default, that is the borrower breaking the mortgage contract and not repaying the mortgage debt. That, plus competition for mortgage borrowers, keeps traditional mortgage interest rates lower than those offered for reverse mortgages, where lender competition and risk-eliminating lender insurance do not exist in Canada.
Best Friend Tip: Negotiate, negotiate, negotiate.
Worst Enemy Tip: Before signing, ask the lender for a written list, with specific details, of the circumstances that could put the mortgage in default and call the debt due and payable. For instance, not keeping property taxes or insurance up to date, or renting out the home are typical default triggers.
For more details, read..." Reverse Mortgages: Best Friend, Worst Enemy...Your Choice! "
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