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Mortgage-Matters

Reverse mortgage FAQs

Reverse mortgages are quite often misunderstood and there are always lots of questions.

Here are some of the most frequently asked questions with the answers.

How does a reverse mortgage work?

A reverse mortgage is secured by the equity in your home. Unlike a traditional mortgage in which you make regular payments, no monthly payments are required.

The big advantage with a reverse mortgage is that you do not have to make any regular mortgage payments for as long as you or your spouse lives in your home.

Who is it for?

A reverse mortgage is designed exclusively for homeowners age 55 and older. This age qualification applies to both you and your spouse.

How much can I get and how is it calculated?

You can receive up to 55 per cent of the value of your home. The specific amount is based on your age and that of your spouse, the location and type of home you have, and your home’s current appraised value. You can contact me and I can quickly give you an estimate of how much you may be approved for.

How do I receive the money?

You can choose how you want to receive the money. A reverse mortgage gives you the option of receiving all the money you’re eligible for in one lump sum advance, or you can take some now and more later, or you can receive planned advances over a set period of time.

Will the homeowner owe more than the house is worth?

The homeowner keeps all the equity remaining in the home. In my many years of experience, over 99 per cent of homeowners have money left over when their mortgage is repaid. The equity remaining depends on the amount borrowed, the value of the home, and the amount of time that’s passed since the reverse mortgage was taken out.

Will the bank own the home?

No. The homeowner retains title and maintains ownership of the home. It’s required for the homeowner to live in the home, pay taxes on time, have property insurance, and maintain the property in good condition.

What if the homeowner has an existing mortgage?

Many of our clients use a reverse mortgage to pay off their existing mortgage and debts.

Should reverse mortgages only be considered as a last resort?

No. Many financial professionals recommend a reverse mortgage to supplement monthly income instead of selling and downsizing, or taking out a conventional mortgage or a line of credit.

What fees are associated with a reverse mortgage?

There are one-time fees to arrange a reverse mortgage such as an appraisal fee, fee for independent legal advice as well as a fee for administration, title insurance, and registration. With the exception of the appraisal fee, these fees are paid for with the funding dollars.

What if the homeowner can’t afford payments?

There are no monthly payments required as long as the homeowner is living in the home.

If you are interested in more information about a reverse mortgage, we have a new website resource at reversemortgage-experts.ca where you can request The Complete Reverse Mortgage Guide. 



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Good debt vs.bad debt

Until recently, there was no such thing as good debt or bad debt; all debt was bad debt.

Owing money for any reason wasn’t a good thing and it was important to focus on paying off everything.

But now, we are hearing about having good debt and having bad debt. So what’s the difference?

Good debt is considered to be funds that you borrow to purchase an appreciating asset. Something that may grow in value such as real estate, a business or investments or a student loan to provide education which will result in earning a higher income.

Bad debt would be money you borrow to purchase a depreciating asset — cars, boats, clothes, consumables — or something that you can’t afford. Something that quickly loses value or doesn’t generate any revenue. It is most likely at a higher interest rate and even if the rate is low today you should also factor in a higher rate to ensure that you can afford it in the future.

High interest rate credit card debt is considered bad debt. Credit cards are not evil if they are used prudently and balances are not carried over.

Mortgages are considered good debt because real estate generally appreciates over time although there are no guarantees. You are also borrowing at lower interest rates.

Home Equity Lines of Credit, which are a type of mortgage, can be either good debt or bad debt depending upon what they are utilized for.

If you are using your Line of Credit to purchase depreciating assets or using it for your day-to-day expenses, it would be considered bad debt. Consolidating your high interest credit card debt into a Home Equity Line of Credit would be ‘good’ as there would be a significant lowering of the interest rate.  

Car loans would be bad debt as you are purchasing a depreciating asset but unfortunately the reality is that this is the only way that most people can afford a vehicle.

The best thing to do is pay cash or as much cash up front for a car as possible. Does everyone really need a fancy, new car?

Pay-day loans or cash advance loans are definitely bad as the interest rates and fees are astronomical.

In reality, it can be argued that no debt is good debt, but used in moderation and with an educated approach, debt can assist in many things.



Mortgages in seller's market

Buying home during a seller’s market can be a bit of a battle, particularly if you own your home and need to sell to purchase a new home.

The question I get asked most often is: Should I buy first or should I sell first?

There is going to be a different answer based on your own situation, so here are some possible financing solutions for you to consider for both of these scenarios.

Buy First — You have found and bought your dream home before you've sold your current home and you are faced with carrying two mortgages for a while – what will you do?

  • Access Equity for Down Payment: You may qualify and be able to afford to carry and own both homes. If the down payment for your new home is tied up in the equity in your existing home, then there are options to get access to that right away. A home equity line of credit, which has no penalties for paying it off, can be arranged to access your equity in your current home for the down payment. The payments are interest only so while you own two homes at once, the payments are low. Once you have sold your existing home you can then pay off the line of credit you used for the down payment in full. 
  • Rent: You could consider renting out your existing home, if it has not sold, on a month-to-month lease so while it is still on the market for sale, you could be receiving an income to assist with the mortgage payments.
  • Refinance: Perhaps the payments are going to be too high to carry two mortgages. It might be possible to re-write your current mortgage to lower the payments or ensure that the mortgage payments for your new home start off very low.
  • Bridge Financing: If your existing home has sold but there is a two or three week period when you own both homes, you can take possession of your new home while you still own your existing home with bridge financing. The lender for the mortgage on your new home will also advance the balance of the down payment ahead of your sale completing. The cost is usually around $250-$300 for set-up and administration and then you pay a daily interest rate based on prime plus 4-6.25 per cent.

Sell First — You have a buyer and offer for your existing home before you've found your next home, and you may find yourself living with family, friends, or in a hotel. This might occur if you haven’t found your new home or if convenient closing dates cannot be negotiated – is it worth it?

This scenario can be a little more challenging and some possible solutions include the following:

  • You could ensure the offer includes a clause that the sale is conditional on you purchasing a new home.
  • You might request a longer closing date to give you time to find a new home.
  • There are some instances when the purchaser of your home might not need to move in the exact day that you are planning to close the purchase. In this particular case you might be able to buy some time by simple “renting” from the new owners. This is useful if you have found your dream home but you are not moving in for a few days or weeks.
  • Bridge Financing: Just as above.

Always speak to a mortgage broker before you start the process to ensure you are pre-approved and are clear on your possible options. The new mortgage rules have made qualifying for a mortgage much more challenging than before so working with someone who has access to all possible solutions is the smartest choice.

There are a number of different options and your own personal situation will determine which option works best for you. I’d be happy to discuss these with you.



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Retirement problems

Since 2005, HSBC has done a survey about retirement and this report can give us a clearer view of what might lie ahead as you move toward retirement.

Both those still on the job and also those who have left the workforce were asked about their concerns and how they might have prepared differently for retirement.

Here are some of the key findings for Canada:

Current retirees 

  • 23 per cent saw their standard of living deteriorate after retiring
  • 31 per cent feel they did not adequately prepare for retirement

Pre-retirees 

  • 61 per cent worry about having enough money to live day-to-day
  • 68 per cent worry they will run out of money

Working age 

  • 81 per cent had a major life event hamper their ability to save
  • 37 per cent are not saving for retirement

Do you have any of the above concerns for yourself or a family member? If you are a homeowner, a reverse mortgage could allow you to covert, with qualification, a percentage of the value of your home into cash without having to move or sell your home.

There are many benefits to a reverse mortgage as it can help to relieve financial stress. There are no payments required as long as you live in the home.

You maintain ownership of your home and the money accessed with a reverse mortgage is tax-free and does not affect any pension income you are currently receiving.

If you are a homeowner over 55 and are in need of funds to pay debt or expenses this could be your solution.

Funds can also be used to purchase a home or to help seniors who want to remain in their homes by making the home more accessible.

The funds could pay for in-home care or medical expenses and are available in either a lump sum or installment payments. Other uses could include paying off debt, renovations or home improvements, travel or to assist children or grandchildren.

There are many myths about reverse mortgages. The bank does not own your home nor can they force you to sell. The rates, although slightly higher than a standard mortgage as no payments are required, are very reasonable.

The homeowner keeps all the equity remaining in the home.

In our many years of experience, over 99 per cent of homeowners have money left over when their loan is repaid.

The equity remaining depends on the amount borrowed, the value of the home, and the amount of time that’s passed since the reverse mortgage was taken out.

Once considered a solution of last resort, reverse mortgages are becoming a solution for retirees who have significant equity in their homes but limited cash resources.

You can also qualify even if you already have a mortgage on your property as the reverse mortgage could be used to pay off that mortgage assuming there is sufficient equity in the property.

If you are interested in more information about a reverse mortgage or have a senior in your life that may feel that they will be forced out of their home due to financial stress, please give me a call to review possible options at 1-888-561-2679 or email [email protected].

We can do a quick assessment to determine whether a reverse mortgage is a possible solution.



More Mortgage Matters articles

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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