At first glance, a reverse mortgage can seem like a great idea, especially for qualifying seniors that are in need of cash and are looking to stay in their home for as long as possible. You’ll gain access to the equity in your home but you won’t need to make any type of payment, interest or principle. And, this type of mortgage only needs to be paid off if you sell your house or die.
Let’s take a look at the pros and cons of reverse mortgages and see how some scammers prey on unsuspecting seniors by roping them into reserve mortgage scams.
What is a Reverse Mortgage?
A reverse mortgage is the opposite of a typical mortgage in that you are not required to make regular loan payments. With a typical mortgage, you borrow a specific amount of money; you’re charged interest for borrowing the money, make regular payments to pay it back, and accumulate equity as you pay off the mortgage.
This is not the case for a reserve mortgage. With a reverse mortgage, you already need to own a house and have accumulated a large amount of equity (equity is the part of a home’s value that is debt-free). You’re loaned a specific amount of money based on the equity you have in your home, either in several phases or one lump sum. You won’t need to make any payments and the interest that is accrued will be added to the balance of your loan. This means your mortgage will steadily increase over time instead of decrease.
Once the owner of the house dies, moves out, or the house is no longer their principal residence, the reverse mortgage must be repaid. Typically this is done through the sale of the house.
When is it a good time to tap into your home equity? Find out here.
Reverse Mortgage Qualifications
Reserve mortgages are not available to everyone and they are so also not a good option for everyone regardless of qualifications. Here are a few things you should keep in mind while determining whether or not a reverse mortgage is right for you and your financial situation:
- In Canada, reverse mortgages are only available to those 55 years of age and older.
- You must already own house.
- You must have paid off a significant portion of your original mortgage and therefore have accumulated equity.
- The appraised value of your home and where it is located will be taken into consideration.
- In Canada, you can only gain access to a reverse mortgage that is up to 55% of the value of your home.
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Advantages of a Reverse Mortgage
While a reverse mortgage may not be the best option for all homeowners, there are in fact several benefits you can take advantage of, if you’re able to qualify.
- You’ll have no regular loan payments to make.
- You’ll be able to turn a portion of the value of your house into cash without the hassle of selling it and moving.
- The money you receive through a reverse mortgage is tax-free.
- The money you receive will be considered income but will not affect any Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) you receive.
- You will remain the owner of the property.
- You’ll have three options to choose from when deciding how you want to receive your money:
- One lump sum payment
- Planned out payments to provide you with a regular income
- Or a combination of both of these options
Concerned about how much mortgage you can afford to take on? Read this.
Disadvantages of a Reverse Mortgage
As with any type of financial product, there are disadvantages. Depending on your lifestyle and financial situation, take into consideration the following disadvantages before you make your final decision.
- This type or mortgage typically comes with a high interest rate.
- The equity that you have accumulated by paying off your mortgage will decrease as the interest on your reverse mortgage increases.
- If you die or decide to sell your house, your reverse mortgage plus the interest that accumulated will need to be paid back within a specific amount of time.
- Reverse mortgages come with quite a few costs, including:
- A high interest rate
- Property appraisal fee
- Application fee
- Closing fees
- Legal fees
- A penalty if you sell your house within the first three years after acquiring a reverse mortgage.
Reverse Mortgage Scams
A reverse mortgage is a perfectly legal product that can help those in tight financial situations, get the cash they need to cover an unexpected expense or even the cost of day to day living. Unfortunately, there are people who have decided to take advantage of those in need and have created several scams revolving around the reverse mortgage. Let’s take a look at three of the most common reverse mortgage scams.
Click here to learn more about the loan scams you should be on the lookout for.
Illegal Information Fees
It’s important to note that there are several types of fees associated with apply for and getting approved for a reverse mortgage, namely appraisal, legal, closing, and administrative fees. But when a reverse mortgage provider asks you to pay a fee for information about the product they’re providing, this is a scam.
Transfer of Property Title
Scammers looking to take advantage of unsuspected seniors will work to artificially inflate the value of their house or convince them that their house is worth significantly more than it actually is. Once they’ve done this, the scammers will then help the homeowner get approved for a reverse mortgage and then convince them to transfer the property title to them.
Often scammers will pose as legitimate representatives from financial institutions and request that the seniors they are targeting send documents and even money to help approve the reverse mortgage. A legitimate reverse mortgage provider or financial institution will never do this, all documentation or fees will be dealt with only after the approval of the loan.