In most cases, you can borrow between 10% and 40% of your home’s value. It depends on what your home is worth, your age and interest rates. You must pay off any other loans on your home, including any unpaid mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition.
5 advantages of a reverse mortgage
- Frees up cash – InvestInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition the money, buy an annuity to create monthly income or use it to cover expenses.
- Reduces cost of borrowing – You pay no taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition on the money you borrow and make no loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition repayments as long as you stay in your home.
- Creates tax breakTax break A credit or deduction that lowers the tax you owe. Governments often offer tax breaks to help people save, go to school or pay costs such as child care.+ read full definition – You can deduct the interest on the loan from your taxes if you invest the money you borrow. This deduction may offset any tax you may pay on unshelteredUnsheltered A regular investment or account that does not shelter your money from tax. In other words, you have to pay tax on your savings and the money you make investing them.+ read full definition investments.
- Allows you to stay in your home – You can maintain your lifestyle in a home you love in an area you like.
- Keeps equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition – You have equity in an assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition that may go up in value, and add to your estateEstate The total sum of money and property you leave behind when you die.+ read full definition.
Make sure your reverse mortgage guarantees that you will never have to pay back more than what your home is worth when you sell it.
8 disadvantages of a reverse mortgage
- Reduces home equity – You may use up most or all of your equity in your home to pay back the loan. This will leave less for your family or estate.
- Does not eliminate costs – You still have to pay property taxes, maintenance costs and home insuranceHome insurance Insurance that covers your home and its contents against losses. Also covers you for accidents that may happen at your home.+ read full definition.
- Builds up debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition – You pay interest on the interest, and you have to pay the loan back when you sell.
- Adds costs – To get the loan, you have to pay appraisalAppraisal An evaluation of what your home or other property is worth today. Most often done by someone who is an expert or is certified by an organization or the government. The Appraisal Institute of Canada is one organization that designates individuals.+ read full definition fees, application fees, legal fees and closing fees.
- Charges higher interest rates – Reverse mortgages have higher interest rates than regular mortgages.
- May increase cost of borrowing – If interest rates go up, your interest payments may increase.
- Difficult to get your money out – You must pay off any loans on your home first, including a regular mortgage.
- Expensive to cancel – There may be high penalties if you change your mind later or want to pay off the loan sooner.
Be aware of the debt you’re building up. You’ll pay interest on the interest. And you have to pay the loan back when you sell your home.