At first glance, a reverse mortgage may seem like a great idea, especially for eligible seniors who need cash and want to stay in their homes for as long as possible. You will have access to the equity of your home but will not have to make any kind of payment, or pay interest. However, this type of loan must be repaid if you sell your house or if you die. Let’s examine the pros and cons of reverse mortgages and see how some fraudsters take advantage of unsuspecting seniors.
What is a reverse mortgage?
A reverse mortgage is the opposite of a typical mortgage in that you are not required to make regular payments. With a typical mortgage, you borrow a specific amount of money. You pay interest to borrow money, make regular payments to repay the loan, and acquire capital when you finish paying the mortgage.
This is not the case for a reverse mortgage. With a reverse mortgage, you must already own a home and have accumulated a lot of equity (equity is the share of the value of a house without debt) . You are then loaned a specific amount based on the equity you have, either in several phases or in a lump sum. You will not need to make any payments and the accrued interest will be added to your loan balance. This means that your mortgage will increase steadily over time instead of decreasing. Once the homeowner dies, moves or the house is no longer their principal residence, the reverse mortgage must be repaid. As a rule, this is done by selling the house.
Prerequisites for a reverse mortgage
Mortgages are not available for everyone and they are not a good option for everyone either, regardless of whether or not you qualify. Here are some things you should keep in mind when assessing whether or not a reverse mortgage is right for you and your financial situation.
- In Canada, reverse mortgages are only available for those 55 and over.
- You must already own a house.
- You must have paid a large portion of your original mortgage and therefore accumulated equity.
- The assessed value of your home and its location will be taken into consideration.
- In Canada, you can only access a reverse mortgage up to 55% of the value of your home.
Benefits of a reverse mortgage
While a reverse mortgage may not be the best option for all homeowners, there are actually several benefits that you can benefit from if you are able to qualify.
1. You will have no regular loan payment to make.
2. You can transfer part of the value of your home in cash without having to sell or move.
3. The money you receive through a reverse mortgage is tax-free.
4. The money you receive will be considered income but will not affect Old Age Security (OAS) or the Guaranteed Income Supplement (GIS) you receive.
5. You remain the owner of the property.
6. You will have three options to choose from when deciding how you want to receive your money:
- A lump sum payment
- Payments planned to provide you with a regular income
- Or a combination of these two options.
Disadvantages of a reverse mortgage
As with any type of financial product, there are disadvantages.
Depending on your lifestyle and financial situation, consider the following disadvantages before making your final decision.
- This type of mortgage usually comes with a high interest rate.
- The equity you have accumulated in repaying your mortgage will decrease while the interest on your reverse mortgage will increase.
- If you die or decide to sell your home, your reverse mortgage plus accrued interest will have to be repaid within a specified time.
- Reverse mortgages are very expensive, including:
- A high-interest rate
- Property Assessment Fee
- Registration Fees
- Closing costs
- Legal fees
- You will have a penalty if you sell your home in the first three years following the acquisition of a reverse mortgage.
Reverse mortgages and scams
A reverse mortgage is a perfectly legal product that can help people in specific financial situations, can get them the money they need to cover an unexpected expense or even help in the cost of daily living.
Unfortunately, there are people who have decided to take advantage of those who need it and have created several reverse mortgage scams. Let’s take a look at three of the most common reverse mortgage scams.
Illegal information fees
It is important to know that there are several types of fees associated with the application and approval of a reverse mortgage, namely valuation, legal, closing, and administrative fees. But when a reverse mortgage provider asks you to pay fees to get information about the product they provide, it is a scam.
Transfer of title
Scammers seeking to take advantage of naive elders will work to artificially inflate the value of their home or convince them that their home is worth much more than it really is. Once they have done this, the crooks will then help the owner to get approved for a reverse mortgage, to convince them to transfer title to them.
Scammers often come forward as legal representatives of financial institutions and ask seniors to send documents and even money to help approve the reverse mortgage. A legal reverse mortgage provider or financial institution will never do so, all documents or fees will only be processed after loan approval.