Considering the Reverse Mortgage?

Reverse mortgage: are you considering it? Even thought I’m no financial advisor, as I’ve been selling Toronto condos for many years, every day I deal with people who know somebody that just got or is considering to take this financial product. Reverse mortgage is a unique kind of house loan that gives you the opportunity to get a part of the value of your house in cash.
People use it quite often in the UK, where it is known under the name "Equity Release". If you are older than 60, you feel you don´t have enough funds and the idea of monthly payments is somewhat stressful for you, the reverse mortgage might be the right solution for you.

The system

Basically, the client using the reverse mortgage is entitled to cash according to the cost of his home, with interest growing in time. The client or his/her spouse is allowed to stay in their house as long as needed, since the debt has to be paid back only after they sell the house or the client (or spouse) moves out or passes away. Usually, you can gain between $20,000 and $500,000 up to 30% of your house equity. If you are older than 70, the maximum is set to 40% of the house value. Now we will go through some pros and cons of this financial product.

Ups

No taxes included. Your budget is not influenced with any monthly payments. The house is still in your possession. It is a good way of paying back your previous mortgage or any other debts you may have, while you don't need to worry about the monthly payments any longer. The interest can be paid step by step. In this case the debit sum does not increase. If you own a different house, you can move the reverse mortgage onto it, either the full amount or only a part. The client is allowed to stop using this product after 3 years, no costs included.
The interest rate diminishes step by step. The financial institution has no chance of foreclosing in case the client borrowed more money than his house is worth. The bank is not allowed to charge more than the rightful price of the house, actually even if the home gradually has lost part of its value.

Downs

Before you enter the program, you have to pay about $1,300. After just a short time, the debt value may even match your house price. For instance, if the interest rate is 10% and you owe $50,000, the debt amount is multiplied by two every 7 years. That means you will owe $100,000 after 7 years and $200,000 after 14 years. In many cases the loan value swallows all the house price, even if the house value grows with time.

Briefly, for house owners who don't have enough money and need to get some in a short period of time, the reverse mortgage might be the right way to go. In contrast to the "classic" mortgage, it is not important how much you earn or what other debts you have, and when you still live in your house, you cannot lose its ownership. One of the risks of the reverse mortgage may be that if used by a considerably young client who is not able or willing to pay off the interest rate regularly, it may become very costly, as the amount borrowed increases with time and growing interests, leaving the borrower with very little or no house value left. Detailed information about reverse mortgage may be obtained from your financial adviser.