“Understanding Reverse Mortgages”...Expanding on Financial Consumer Agency of Canada information
Posted by PJ Wade at 2/5/2012 5:36 PM 
Categories: Continuing Education and Presentations, Reverse Mortgage Industry, Home Equity Management
Categories: Continuing Education and Presentations, Reverse Mortgage Industry, Home Equity Management
“Understanding Reverse Mortgages”...Expanding on Financial Consumer Agency of Canada information
The government provides basic details to provide a starting point for consumers. Here are a few ideas on what more you need to learn in your search for understanding when it comes to reverse mortgages
The FCAC material in itallics is expanded on in the section directly below that sentence or section from "Understanding Reverse Mortgages".
1. FCAC: “A reverse mortgage is a loan that is designed for homeowners 60 years of age and older.”
Reverse mortgages favour homeowners over age 70, because the cash liberated is spread over fewer years than at age 40. Reverse mortgages are available to homeowners under age 60:
• When a reverse mortgage lender, commercial or private, makes payment size practical enough that taking on the cost of this mortgage makes sense to a property owner. Intra-family situations may have lower or no profit expectations and make this practical. Fixed-term closed reverse mortgages, which run for less than 5 years with no renewal, may be less age specific. Examples could include bridge financing between salary and pension, or until a legacy or business sale is finalize.
• When an owner aged 50 or older is the spouse of a homeowner over the qualification age required by a specific reverse mortgage lender.
• When a shorted life expectancy due to a chronic condition or terminal illness, makes projections of their remaining time similar to those of more advanced years.
2. FCAC: “A reverse mortgage is secured by the equity in the home, which is the difference between the value of your home and the unpaid balance of any current mortgage.”
A reverse mortgage is secured by real estate equity, which is the difference between the value of the house, condominium unit, or cottage and encumbrances registered on title, including the unpaid balance of any current mortgage.
3. FCAC: “It allows homeowners to obtain cash without having to sell their home.”
A reverse mortgage is a financial, lifestyle, and wealth management tool which allows a property owner to convert equity into cash
• without having to sell and move
• without having to qualify by income
• without having to repay the mortgage debt (principal and interest) until a pre-set time in the future.
4. FCAC: “The Canadian Home Income Plan (CHIP), which is offered by HomEquity Bank, is the main source of most reverse mortgage products that are available in Canada. You can also speak to your financial institution about other options that may meet your needs.”
Banks, insurance brokerages, and other financial services companies advertise, but do not originate reverse mortgages. They refer their clients to CHIP salespeople and receive a referral fee in exchange. You can also speak to mortgage brokers, and other local financial advisors to discover whether local or regional reverse mortgage lenders are lending in your area.
5. FCA: “With a reverse mortgage you don’t make any payments. Instead, the interest on your reverse mortgage accumulates, and the equity that you have in your home decreases with time. If you sell your house or your home no longer is your principal residence, you must repay the loan and any interest that has accumulated.”
With a reverse mortgage, property owners don’t make any payments, although the mortgage contract may allow them to repay some of the debt, under set conditions, if they elect to, thereby reducing the total amount due. The interest on the reverse mortgage compounds at a rate stipulated in the mortgage contract (i.e., monthly, bi-monthly, annually) and the total amount of interest due accumulates, so equity decreases over time. If the real estate is sold, or you don’t meet the residency requirements in the mortgage contract, i.e. absence for a prolonged period or renting out, the mortgage, that is principal and accumulated interest, becomes due for repayment.
6. FCAC: “Before you decide to get a reverse mortgage, take the time to understand all the terms that apply, and to weigh the advantages and disadvantages.
Advantages
• You don’t have to make any regular payments on the loan.
• You can turn some of the value of your home into cash, without having to sell it.
• The money you borrow is a tax-free source of income.
• This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be receiving.
• You maintain ownership of your home.
• You can decide how you want to receive the money. You can choose to receive:
- a lump-sum payment
- a loan to set up planned advances that provide you with a regular income
- a combination of these options.”
Additional Advantages
• A non-recourse or limited-liability clause will limit liability for repayment of the reverse mortgage to the market value of the real estate at the time the mortgage becomes due and payable. The lender will not have legal recourse to collect any amount over this from the property owner, heirs, or the estate. The reverse mortgage lender must absorb all and any loss between the market value of the property and the full amount of the reverse mortgage including all interest.
• If there is no more equity left to pay out to the homeowner, the homeowner may continue to retain ownership and live in the real estate until one of the conditions stipulated in the mortgage contract as grounds for termination is reached. These may include absense from the property for a stipulated time, loss of principal residence status, non-payment of property taxes, lapse of property insurance, non-payment of condominium maintenance fees, or failure to keep the property “in good repair”, according to terms in the mortgage contract.
• The reverse mortgage debt may be repaid from the property owner’s other assets or resources, or by the sale of the property.
• If the reverse mortgage allows, the surviving spouse can continue to live in the property after the death of one property owner.
7. FCAC: “Disadvantages [EXPANDED MATERIAL IN CAPS]
• Reverse mortgages are subject to higher interest rates than most other types of mortgages.
• The equity you hold in your home will decrease as the interest on your reverse mortgage accumulates over the years, UNLESS REPAYMENT OF PART OF THE PRINCIPAL OCCURS AND/OR THE MARKET VALUE OF THE PROPERTY INCREASES.
• At your death, your estate will have to repay the loan and interest in full within a limited time. The time required to settle an estate can often exceed the time allowed to repay a reverse mortgage. For full details, READ THE REVERSE MORTGAGE CONTRACT BEFORE SIGNING AND check with the reverse mortgage lender.
• Since the principal and interest will be repaid to the lender at your death, there will be less money OR NO EQUITY LEFT in your estate to leave to your children or other heirs.
• The costs associated with a reverse mortgage are usually quite high. They can include:
- a higher interest rate than for a traditional mortgage or line of credit
- a home appraisal fee, AND AN application fee or closing fee
- a repayment penalty for selling your house or moving out within A STIPULATED PERIOD, SUCH AS three years, of obtaining a reverse mortgage
- fees for independent legal advice.”
- ONGOING ADMINISTRATION COSTS
- INCREASES IN PROPERTY TAXES, MAINTENANCE EXPENSES, INSURANCE, AND CONDOMINIUM FEES
• THE LENDER MAY NOT PERMIT THE PROPERTY OWNER TO PARTICIPATE IN A PROPERTY TAX DEFERRAL PROGRAM WHICH WOULD DISPLACE THE REVERSE MORTGAGE AS THE FIRST CLAIMANT ON TITLE.
Content used to expand FCAC copy was taken from “Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!” www.CatapultPublishing.com
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