How Exactly Does A Reverse Mortgage Work

How A Reverse Mortgage In Canada Works

A reverse mortgage in Canada is another way to get the money out of your home and you get to stay in the house that you bought with hard work over the years. If you have paid off your mortgage and have moved into retirement, you likely enjoy the freedom from having a mortgage payment each month. However, if you are starting to have worries about the rest of your retirement funding, you may be wondering whether the money you have invested in your home might not do more good in your bank accounts. Some people choose to sell their homes and move into a smaller place because of the upkeep and expense of staying in their former houses. After all, the kids have moved on, and theres just no reason for all that space.

Canadian Reverse Mortgage RulesBefore you can enter into a Canadian Reverse Mortgage, there are several rules that you have to follow.

1. The loan that you get will depend on how old you are, the value of your house and where the house is located. The lowest amount you can take out is $20,000, and the highest amount is $750,000. To find out your own eligible amount, though, you must conduct an independent appraisal of the property. You can pay for the cost of this appraisal out of the proceeds of your reverse mortgage, though, along with any other closing costs.

2. You have to be at least 55 years old to get a reverse mortgage if you are married, you both have to be at least 55.

Reverse mortgage lenders in Canada

Example Of How A Reverse Mortgage Works

John and Anne are a retired couple, aged 72 and 69, who want to stay in their home, but need to boost their monthly income to pay living expenses. They would like to remodel their kitchen. They have heard about reverse mortgage loans but didnt know the details. They decide to contact a reverse mortgage loan advisor to discuss their current needs and future goals if they could gain access to a portion of the funds stored in their homes equity.

An FHA appraiser determines that their homes value is $400,000. They currently owe $35,000 on their mortgage. Below is an illustration of how John and Anne spend their loan proceeds.*

This example is based on Anne, the youngest borrower who is 69 years old, a variable rate HECM loan with an initial interest rate of 2.495% .

It is based on an appraised value of $400,000, origination charges of $6,000, a mortgage insurance premium of $8,000, other settlement costs of $2,740, and a mortgage payoff of $35,000 amortized over 372 months, with total finance charges of $16,740 and an annual percentage rate of 4.87%. Interest rates may vary and the stated rate may change or not be available at the time of loan commitment.*The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM reverse mortgage requirements. In addition, the borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance. Information accurate as of 03/28/2019.

How Much A Reverse Mortgage Can Cost

Costs associated with a reverse mortgage may include:

• a higher interest rate than for a traditional mortgage
• a home appraisal fee
• a prepayment penalty if you pay off your reverse mortgage before it is due
• legal fees for closing costs or independent legal advice

The costs will vary depending on your lender. Some fees may be added to the balance of your loan. You may have to pay for others up front.

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Unique Credit Line Growth Feature

In the past, many considered the reverse mortgage loan a last resort.

Let us consider a borrower who is savvy and is planning for her future needs.

She has the income for her current needs but is concerned that she may need more money later.

So, she obtains her reverse mortgage and after the costs to obtain the loan has the same $200,000 line of credit available to her.

Her line of credit grows at the same rate on the unused portion of the line as what would have accrued in interest and mortgage insurance premiums had she borrowed the money.

As the years go by, her credit line increases, meaning if she one day needs more funds than she does now, they will be there for her.

If rates do not change, here is what her access to credit looks like over time:

• 10 years: $350,000
• 20 years: $660,000

Remember, that is if rates do not change.

If interest rates go up 1% in the third year and one more percent in the 7th, after 20 years her available line of credit would be more than $820,000.

Now of course this is not income, and if you do borrow the money you owe it and it will accrue interest.

You or your heirs would have to pay it back when the property sells.

But where else can you ensure that you will have between $660,000 and $800,000 available to you in 20 years?

How A Reverse Mortgage Impacts Your Home Equity

Reverse mortgages, second mortgages and home equity lines of credit provide three different ways to create cash flow from a house you own. Of these three options, however, only the reverse mortgage does not require both income to qualify, and at least minimal monthly repayment during the borrowing term.

With a reverse mortgage, the existing home equity is used as security for the funds provided by the reverse mortgage. After the reverse mortgage is established, any future growth in the value of the house goes to the homeowner.

Calculating the impact of the reverse mortgage on home equity thus becomes a function of estimating the term of the loan, the homes value at the end of that term and the interest payable on the advanced funds.

HomeEquity Bank provides two illustrations for a borrower whose house is worth $600,000 and who takes a reverse mortgage of $150,000 at current five-year rates of 5.59%, repaid after 15 years.

At a modest house appreciation rate of 2%, the homeowner has $450,000 in equity remaining when the reverse mortgage is established, anddue to housing price appreciation is left with $451,826 in home equity after 15 years. In other words, the homeowner isin nominal termsno worse off at the end of the reverse mortgage term as a result of borrowing from their home equity than they were at the start of the reverse mortgage term.

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What Is A Tenure Payment Plan

A tenure payment plan is a way to receive reverse mortgage proceeds where the borrowers get equal monthly payments for as long as they live in the home. The tenure payment plan has an adjustable interest rate. Interest accrues on monthly payments as the borrower receives them. Interest also accrues on any financed closing cost, including the upfront mortgage insurance premium and the ongoing monthly mortgage insurance premiums.

All of these costs togethermonthly tenure payments, interest, closing costs, and mortgage insurance premiumsmake up what the borrower owes when the reverse mortgage becomes due and payable.

What Can You Pay For With A Reverse Mortgage

Here is a shortlist of expenses you can pay for with funds from a reverse mortgage:

• Medical debt
• Another home purchase
• Or, you can use it as supplemental income

There are no stated constraints for how you use the money. But that doesnt mean you should run right out and get one. Be sure to read the pros and cons to understand if this financial tool makes sense for your situation.

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How Do You Qualify For A Reverse Mortgage In Canada

The Canadian government makes it easy for senior homeowners to qualify for reverse mortgages. The five things lenders typically look at are:

Typically, as long as youre 55+ and have a home thats worth something, youll be approved for a reverse mortgage. Generally, the older you are, the larger amount of equity youll be able to borrow, as the lender foresees you having less time to spend it.

Reverse Mortgage In Canada Dos

Since this product was created by HomEquity Bank specifically to help Canadian seniors, the process to secure a reverse mortgage is streamlined to quickly and easily provide access to the funds. A reverse mortgage loan can best serve its purpose if you consider certain guidelines before securing a loan and while utilizing the proceeds:

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Who Can Get A Reverse Mortgage

Proprietary and Single-Purpose reverse mortgages may be governed by different policies or regulations, depending on the private lender, government agency, or nonprofit involved. You will have to discuss requirements and eligibility with the lender, agency, or nonprofit providing the loan.

Home Equity Conversion Mortgages are made by private lenders but are insured by the Federal Housing Administration and must follow FHA rules. The FHA has a number of Eligibility requirements before you can get a HECM:

• You must be 62 or older.

• You must own your home and it must be your primary residence.

• Single-family homes, multi-family homes up to 4 units, and manufactured homes or condominiums that meet FHA standards are eligible for reverse mortgages.

• Your mortgage must be fully or almost fully paid off.

• Your home must be in good enough condition to pass an inspection and must not be in a flood risk area.

• You must not have any tax deficiencies or other debts to the government.

A HUD-certified counselor will confirm that you meet these conditions and assess your finances. The counselor must be satisfied that you can meet several conditions:

• You must be able to pay for property taxes and homeowners insurance.

• You must have the financial capacity to maintain the home.

• You must be able to pay for admittance into a homeowners association or other necessary fees.

Borrower Requirements For A Reverse Mortgage

• Youngest borrower must be at least 62 years old
• At least one borrower must live in the home a majority of the year
• The borrowers must pay property taxes, home insurance, repair, and HOA fees even if they choose not to make mortgage payments
• Borrowers must maintain the quality of the home
• Borrowers cannot be delinquent on any federal debts
• Must receive counseling with a HUD-approved reverse mortgage counselor

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What Can You Use The Funds For

Funds from federally-insured HECM and proprietary reverse mortgages can be used however you wish, including to cover living expenses, home improvements, medical costs, additional insurance. With a single-purpose reverse mortgage, you must use the funds for one purpose, as specified by the lender. For example, your lender may designate the funds only be used for home repairs.

How Do Reverse Mortgages Compare To Borrowing Against My Home

Though a reverse mortgage is a good way to use your home to access money, another less risky option to consider in this regard is to borrow against your home. You can do so via a home equity loan or a home equity line of credit, or HELOC.

With a home equity loan, you borrow a lump sum and pay it back over time, with interest. With a HELOC, you get access to a specific sum of money you can draw from as needed, at which point you only pay back the amount you actually borrow.

With a home equity loan, you’ll generally need to start repaying the amount you borrow shortly after you borrow it. With a reverse mortgage, you don’t owe any money until you die or vacate your home. But with a home equity loan or HELOC, the criteria aren’t as strict — you can qualify for them at any age, provided the equity in your home is there.

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Whats Involved With The Reverse Mortgage Process

After talking with your reverse mortgage professional and learning more about reverse mortgages, you will be able to determine if a reverse mortgage can help you with your specific situation. If you find that it will, you are ready to continue with the next steps in the reverse mortgage process.

The first thing you will need to do before you can even apply for the reverse mortgage loan is to complete a counseling session with an unbiased reverse mortgage counselor who is approved by the U.S. Housing and Urban Development . Your reverse mortgage professional will send you a list of the nearest HUD-approved counselors to your location.

The entire purpose of the counseling session is to provide you with yet another source for obtaining information and clarity about all your options, in order to ensure that you are able to make an informed and knowledgeable decision about whether or not a reverse mortgage can help your situation. The approved HUD counselor will do the following:

Upon completion of the counseling session, you will receive a certificate verifying your fulfillment of this requirement, which you will give to your reverse mortgage professional.

You will then meet with a HUD-approved appraiser at your home. The appraiser will determine the value of your home based on its fair market value. In addition, if any repairs need to be made, the appraiser will note that as well.

Should I Get A Reverse Mortgage

Reverse mortgages might seem like a great deal, but they’re not right for everyone. If you can’t keep up with the costs of owning your home, then they’re not a helpful solution. And if you pass away unexpectedly, your loved ones who inherit your home may find themselves stuck in a tough financial spot when that loan immediately becomes due.

But if you dont have heirs to leave your property to, then a reverse mortgage may not be such a bad idea. If you’re okay with your home being sold upon your passing to pay off your mortgage, then this option might be worth looking into.

If you’re going to get a reverse mortgage, make sure you understand exactly what you’re signing up for, and review the costs involved. You may find that there’s a better solution for accessing money that doesn’t entail the same risks as a reverse mortgage.

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How Much Does A Reverse Mortgage Cost

Just like a traditional mortgage, there are costs associated with getting a reverse mortgage, specifically the Home Equity Conversion Mortgage . These costs are typically higher than those associated with a traditional mortgage. Here are a few fees you can expect.

Upfront MIP: The upfront mortgage insurance premium is paid to the FHA when you close your loan. The MIP protects you and the lender by making the loan a nonrecourse loan.If the home sells for less than what is due on the loan, this insurance covers the difference so you wont end up underwater or with negative equity on your loan and the lender doesnt lose money on their investment.

It also protects you from losing your loan if your lender goes out of business or can no longer meet its obligations for whatever reason. In that case, FHA takes over so you can still access your loan proceeds.

The cost of the upfront MIP is 2% of the appraised value of the home or $726,535 , whichever is less. For example, if you own a home thats worth $250,000, your upfront MIP will cost around $5,000.

Along with an upfront MIP, there is also an annual MIP that accrues annually and is paid when the loan comes due. This charge is usually around .5% of the loan balance.

Origination fee: The mortgage origination fee is the amount of money a lender charges to originate and process your loan. This cost is 2% of the first $200,000 of the homes value plus 1% of the remaining value after that.

Spouses And Partners Have Both Rights And Obligations

When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesnt have to be repaid until the second spouse moves out or dies.

Because HECMs and other reverse mortgages dont require repayment until both borrowers die or move out, the Consumer Financial Protection Bureau recommends that both spouses and long-term partners be co-borrowers on reverse mortgages.

If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan as soon as you move or die. As for whether they can remain in your home without repaying, that depends on the timing of the HECM and the timing of your marriage.

If a reverse mortgage borrower took out an HECM before August 4, 2014, then a non-borrowing spouse does not have a guaranteed right to stay in the house. Instead, a non-borrowing spouse will either have to move out of the house or pay off the reverse mortgage within six months of receiving notice from the lender.

The rules are different for HECM loans that were issued after August 4, 2014. With these loans, an eligible, non-borrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they meet these criteria:

If youre an eligible non-borrowing spouse, the reverse mortgage will not need to be paid until you die or move out of the house.

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