Understanding Reverse Mortgage

Posted on October 8, 2021

Do you need extra cash? Have you run out of liquid assets? Are you getting frustrated with the lack of financial support?

If so, you've come to the right place. We're here to tell you how you can access money from the equity that you've built in your home. Through a reverse mortgage loan, you could turn your home equity into cold, hard cash.

Over time, you'll receive payments just like you would at a job. Your property will become your source of income.

Reverse mortgages are changing personal finances for individuals all around Canada. This kind of home loan could do the same for you.

What Is A Reverse Mortgage?

A reverse mortgage is a financial tool that allows you to use the equity in your home as a source of income. It allows homeowners to access the money that they've invested into their homes.

For those who have little or no income, reverse mortgage loans act as a security blanket. They allow you to continue living in your home while receiving income from its equity. 

You may qualify for a reverse mortgage loan if you're at least 55 years of age and have a home that you've paid for in full. If you believe that a family member may qualify for this loan, you may be able to take care of them by recommending a reverse mortgage loan.

Reverse Mortgage Canada

In Canada, there are two financial institutions that offer reverse mortgages:

  1. The CHIP Reverse Mortgage from HomeEquity Bank
  2. The PATH Home Plan from Equitable Bank

The CHIP Reverse Mortgage is available across Canada. You can work directly with HomeEquity Bank or with a mortgage broker.

The PATH Home Plan is available in Alberta, British Columbia, Ontario, and Quebec. To access this reverse mortgage, you'd work with a mortgage broker in the appropriate area.

How Does A Reverse Mortgage Work in Canada?

A reverse mortgage acts as a way to get liquid assets. It's a great choice for those who have little to no income and little to no access to liquid assets. You can see how your income measures up to Canada's average income to decide whether or not you may be able to take advantage of this mortgage loan.

The reverse mortgage accesses these funds by using a percentage of the value of the home. From here, you can convert this amount of equity into cash and use it to buy an annuity. This process guarantees the homeowner a consistent income stream.

The cash that you take out of the home becomes registered against the title of your home. Therefore, it's similar to a traditional mortgage.

However, with a reverse mortgage, you don't need to make any regular payments.

You can take up to 55% of the home's value and turn it into cash. You can receive this cash in a lump sum, monthly payments, or a combination of both payment types. You'll receive the cash that you're owed from the bank/lender that you're working with. 

If you sell the house or change it from being your primary residence, you must repay the loan plus any interest that you accumulated. 

If the homeowner passes away, the bank/lender will collect the mortgage amount plus interest after the sale of the home. The beneficiaries of the deceased will have access to any leftover funds after the bank's collection.

The amount that you repay for the loan will never exceed the fair market value for the home. In fact, you get to keep any extra cash that comes from the appreciation of the home over time.

While you're working with the reverse mortgage, you do have to continue paying taxes and insurance on the home.

CHIP Reverse Mortgage

A CHIP reverse mortgage is one of the ways that you can access a reverse mortgage in Canada. There are four steps to getting your reverse mortgage through CHIP:

  1. Estimate
  2. Review
  3. Receive
  4. Payment

First, you have to estimate how much money you can get from a reverse mortgage. This amount comes from your home's value. CHIP offers a free estimate for your home.

Next is the review process. After you get your free estimate, a CHIP consultant/specialist will call you to talk about the reverse mortgage process. They'll verify your personal information and ask a few questions regarding the status of your home.

Once they've put everything together and confirm that you meet the qualifications for the reverse mortgage, you'll get approved. Then, you can start receiving your payments in lump sums or monthly installments.

The final step is the payment. Contrary to a traditional mortgage, a reverse mortgage doesn't require you to make monthly payments.

However, you do have to pay off the mortgage and any interest when the homeowner is no longer in the home. This could happen when they sell the house to another person, when they transfer primary residence to another home, or when they pass away.

Mortgage Features

Reverse Mortgage Calculator

As you near retirement, your home becomes one of your biggest financial assets. As such, you should put it to work for you as a part of your retirement plan. Implementing a reverse mortgage can help protect your other long-term investments.

By using your home as an income supplement, you can consolidate debt and reduce your tax payments.

In order to figure out how much you can get out of your home, you need to use a reverse mortgage calculator. It uses multiple factors to determine what kind of reverse mortgage loan you can get from your home:

  • Your age
  • The ages of any other homeowners
  • The current value of your home
  • The location of your home
  • The type of home that you have

By inputting these factors into the reverse mortgage calculator, you can get an accurate estimate of the amount of money that you can get from a CHIP reverse mortgage.

It's important to take the time to plan out all of the finances in advance. You want to make sure that you understand what you're getting involved with before you agree to take on the loan.

While there aren't any catches when it comes to this kind of loan, you should make sure that you'll be able to handle the payment upon the sale of the home.

You should also look into the current APR offerings for reverse mortgages. Like other loans, this interest rate can shift with time. So, you want to make sure that you're getting the best deal possible.

On top of this, you should decide what kind of loan term you want. It could be six months or a couple of years.

You can use the calculator to play with numbers and figure out what kinds of factors would be best for you and your home.

Just like any mortgage or other loan, you should take time to do research and make calculations. This information can help you decide whether or not the CHIP Reverse Mortgage is the right choice for you.

Getting A Home Appraisal

After you get the estimated calculation from the reverse mortgage calculator, you need a home appraisal for a more precise evaluation. While the calculator is accurate, you still need to have the appraisal to make sure that the estimated home value is the true home value.

During the appraisal, the appraiser may find factors that make your home more or less valuable than the current fair market value that's listed online for your home. Since a CHIP Reverse Mortgage allows homeowners to take out up to 55% of their home's value, it's important to get an accurate assessment of your home's true value. Without it, you may not be getting the most out of the reverse mortgage loan.

Reverse Mortgage Pros

Reverse mortgages offer a lot of advantages for people over 55 who need access to funds. When compared to similar offers, reverse mortgages are easier to understand and simpler to get started with.

If you're thinking about taking advantage of a reverse mortgage, you should consider all of the advantages that come with it:

  • You don't need to make any regular payments on a reverse mortgage loan
  • You don't have to sell your home to take advantage of the equity that you already have in it
  • The income that you're getting from your home equity is free from taxation
  • The income doesn't affect any benefits that you may be getting from Old Age Security (OAS)
  • The income doesn't affect any benefits that you may be getting from Guaranteed Income Supplement (GIS)
  • You can maintain ownership of your home during the length of the reverse mortgage
  • You can decide whether you receive the money in a lump sum, monthly payments, or a combination of both options
  • You can use the money that you receive from the reverse mortgage to improve your standard of living

Reverse mortgages offer a way for you to take advantage of your home equity without giving up the independence that you currently have. The only thing that you have to worry about is paying back the loan at the end of the term, but that's standard for any loan.

With a reverse mortgage, you have control over what happens to you and your home. You don't have to worry about someone taking away your home or leveraging the money against you.

You can also use the money however you want. You can renovate your home, buy groceries, or invest in something else.

Reverse Mortgage Cons

On the other hand, there are three disadvantages that you should keep in mind as you're deciding whether to apply for a reverse mortgage. 

First, there are several costs involved in establishing a reverse mortgage:

  • A home appraisal fee
  • An application fee
  • A closing fee
  • A repayment penalty if you sell the home or move out within a specified amount of time
  • Fees if you ask for independent legal advice

In addition, reverse mortgages tend to have higher interest rates than traditional mortgages. As you're shopping for the right reverse mortgage for you, you should keep an eye on the interest rates. You may be able to get a lower APR if you pay attention to the fluctuations in interest rates.

Second, your family may have to worry about repaying the loan if you were to pass away during the length of the mortgage. In addition to the mortgage, they'll also have to repay the owed interest within a limited amount of time after your death.

Third, your beneficiaries may get less money from your estate upon your passing. The equity that you have in your home will decrease as the interest on your reverse mortgage increases over time. Therefore, after paying off the mortgage and interest, your beneficiaries will get less money from your estate when you pass away.

Considerations with A Reverse Mortgage

If you're looking for a way to get access to funds without selling your home, a reverse mortgage may be for you. While you're shopping for a reverse mortgage, you should keep up with the current interest rates for reverse mortgages

This will also help improve the financial condition of your estate if you were to pass away before the end of your reverse mortgage term. A lower interest rate will mean that you (or your family) will owe less at the end of the mortgage.

Since you don't have monthly payments on your reverse mortgage, you should keep your repayment plan in mind as you approach the end of your mortgage term. If you make a repayment plan yourself, you make it easier for yourself (or your family) to pay back the loan at the end of the term.

Reverse Mortgage Loans

A reverse mortgage loan is one of the best options for retirement-aged individuals who are looking to liquidate part of the equity that they have in their home. If you aren't planning on selling or moving any time soon, this may be a great option for you to get some money from your long-term investment.

To learn more about current mortgage rates in Canada, you can depend on Insurdinary.

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