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Reverse Mortgages

Turning your home into gold…  Will it work for you?

By Barry Lebow (or Frances O’Flynn)

These days you can’t watch TV, listen to the radio or flip through a magazine without someone offering to lend you money based on the equity you’ve built up in your home.

Everywhere there are references to home equity loans, home equity lines of credit and, of course, reverse mortgages. All use your family home as collateral. All provide you with cash to use as you wish. And all cost you money.

The lure is totally understandable. As baby boomers move into their senior years they are often house-rich and cash-poor. So it may seem like a fairy tale to able to renovate, travel or lend money to family without wallowing in debt. Like King Midas, we’ll just turn our house into gold. Simple. Or is it? Let’s look at all the options.

Many financial institutions offer variations on a home equity loan. This vehicle allows you to borrow up to 75 percent of the market value of your home (minus the amount of your existing mortgage) often at a fixed interest rate amortized over 20 to 25 years, however you will have to begin to repay the loan immediately through regular payments.

A home equity line of credit is a variable-rate line of credit that allows you to access up to 80 percent of the appraised value of your home (again, less the outstanding balance of your current mortgage). You can pay back just the interest or make larger payments depending on your circumstances.

Then there’s the reverse mortgage. Intended for couples who are both 60 plus, this option allows you to take out from 10 to 40 percent of the equity you have built up in your home and not pay it back until it’s sold or you die and the loan is repaid by your estate. Instead the interest on this mortgage accumulates, reducing the equity in your home.

To cash strapped baby boomers, this may sound like the perfect solution, but before you start planning that exotic around-the world vacation or total reno, consider some of the pros and cons of this option.

On the pro side, the money borrowed through a reverse mortgage is tax-free. Also your credit rating (or lack of it) doesn’t come into it and unlike lines of credit or regular mortgages, you won’t be asked to sell your home to settle the debt. If you previously qualified for benefits through the Old Age Security or Guaranteed Income Supplement programs, your eligibility for these programs is not affected by your reverse mortgage income. Finally, the amount owing will never exceed the fair market value of the home; your estate will never be asked to pony up any extra money to settle a reverse mortgage.

On the down side, as interest accrues over the years, equity decreases. The amount owning can double every 10 years so someone borrowing $100,000 through a reverse mortgage could end up owing $200,000 in 10 years and $400,000 in 20 years – a scary thought.

Another negative is that the interest rate on reverse mortgages is often higher than either a regular mortgage or a line of credit and you may have to pay an application fee, an appraisal fee and/or closing fees as well as legal costs. If you sell before three years, there is a stiff repayment penalty. So a spouse, anxious to move out of the family home after the death of a partner, may not be able to sell when he or she wishes without incurring a penalty.

Lastly, even when the housing market is strong and the family home appreciates over the 20-year life of a reverse mortgage, there still may not be much left for the heirs once the loan has been repaid. Whether or not this is an issue depends on your individual situation.

There may be a better way than selling the equity in your home. You could decide to reduce expenses and make the move to a smaller house or condo. As gut-wrenching as this decision can be, it often is the best possible solution. If you’re facing this move you may want to consider asking an expert for help. In many Ontario cities there are experienced Realtors who have taken courses to become Accredited Senior Agents. ASAs have worked hard to “earn their stripes” and are well qualified to help those in the 55 plus age group through the maze of possibilities. Everything from having your home appraised by an expert to helping you de-clutter and staging your home for sale – ASAs offer value-added services when and where you need them.  To find an ASA in your area or to find out more about the program, visit www.thesenioragent.com  or contact, Barry Lebow, President and Founder, Senior Housing Council, The Real Estate Academy Inc., providers of the Accredited Senior Agent designation, 416-784-9806 ext. 107.