What is a reverse mortgage?
A reverse mortgage may not be what you think it is. Find out exactly what it means and why some Canadians are confused about this financial service.
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A reverse mortgage may not be what you think it is. Find out exactly what it means and why some Canadians are confused about this financial service.
A reverse mortgage enables a home owner to borrow up to 55% of the appraised value of their primary residence, paid either as a lump sum or in multiple payments over time. The borrower must be age 55 or older and have paid off any existing mortgage, home equity line of credit (HELOC) or other debt secured by the same property. They can use the proceeds of the reverse mortgage to pay off this debt.
Reverse mortgages are designed to allow home owners to access some of their accumulated home equity without selling their homes. No payments are due until the home owner moves, dies or defaults on the loan. When any of these events occur, the loan becomes due and must be repaid. (In the context of reverse mortgages, “default” means allowing your home’s condition to deteriorate, violating the conditions of your reverse mortgage contract, using the money for something illegal, being dishonest on your reverse mortgage application or other scenarios. Check how the lender defines “default.”)
Reverse mortgages often charge additional costs and higher interest rates than regular mortgages. Borrowers should take care to fully understand the details of the mortgage contract before signing, possibly with the help of an independent financial or legal advisor.
In Canada, unlike in the United States and elsewhere, reverse mortgages are highly regulated to protect home owners. In fact, Canadians only have access to three providers of reverse mortgages: HomeEquity Bank, Equitable Bank and Bloom Financial. South of the border, however, there are many reports of reverse-mortgage scams through contractors, relatives and others, essentially robbing seniors of their home equity.
Example: “After he retired, Serge took out a reverse mortgage to supplement his pension. He had no heirs, so he wasn’t concerned about depleting the equity he’d built up in his home.”
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