What
is a Reverse Mortgage and Why Does This Not Mean Additional
Debt?
A Reverse Mortgage is a method of allowing home owners to turn the equity
in their homes into monthly cash without making mortgage payments or
selling their homes. It is designed for home owners who have paid off
their mortgages and own their homes free and clear. Contrary to a regular
mortgage the home equity gradually
decreases. No payments are made on a Reverse Mortgage until the home is
sold at which time the initial loan plus the interest must be paid back. Because
the "income" from a Reverse Mortgage are classified as a loan
rather than income, they are non-taxable. It is an asset you
already have.
A Reverse Mortgage helps by providing seniors with the funds to stay in
their homes longer, to give them the opportunity to help their children if
needed, or funds for renovations to help with 'aging in place.'
Are There
Any Dangers?
The obvious danger is using up your equity too quickly. Most
Canadian companies are very cautious about how much will be loaned.
They lend you a part of the value of your home to make sure that all the
equity is not used up.
It is important to fully understand the details and to have a good idea
of how long you can use the equity at the proposed rate of
withdrawal. Knowing all the facts is always the best advice. Make
sure you talk with others before committing to the mortgage.
All
Reverse Mortgages Are Not Equal
The most common Reverse Mortgage currently available is the Reverse
Annuity Mortgage. The home owner borrows a lump sum using
current equity. Interest is charged on the lump sum which used to
purchase an annuity. The annuity gives the borrower monthly payments
for the rest of the borrower's life. So even when the home is sold and the
Reverse Mortgage is paid off, the home owner still owns the annuity and
the payments will continue.
Part of the equity, say $50,000, is used to buy an annuity which
pays out $250. a month. When the house is sold, the $50,000 plus interest
is paid back. The $300 monthly income from the annuity continues for the
rest of the life of the home owner.
This method is best for people who want to top up an existing monthly
income with a bit extra. The Annuity purchase can be relatively expensive
because of the interest. .
Another type of Reverse Mortgage is the Line of Credit
Reverse Mortgage. This plan allows you to take out only the amount of
money required at any given time. Interest is calculated on the
total accumulated amount withdrawn.
For example, a home is worth $100,000. The home owner takes out a Line
of Credit Reverse Mortgage, and withdraws $3,000 in the first year to pay
for daily expenses. Interest is charged on the $3,000. The next year, $3,
000 is taken out, again for daily expenses plus $2,000 is taken out to pay
for a new roof. Interest is charged on the total amount withdrawn ($5,000)
and the interest accumulated on the $3,000 from the previous year.
Consider the
following example of a three year period for typical Line of Credit
Reverse Mortgage:
|
$3,000
per year for monthly expenses plus a one time $2,000 in the 13th
month for a repair expense |
| Month |
Monthly
|
Cumulative |
8%
Monthly
Interest |
| 1 |
250.00 |
250.00 |
1.67 |
| 2 |
250.00 |
500.00 |
3.33 |
| 3 |
250.00 |
750.00 |
5.00 |
| 4 |
250.00 |
1,000.00 |
6.67 |
| 5 |
250.00 |
1,250.00 |
8.33 |
| 6 |
250.00 |
1,500.00 |
10.00 |
| 7 |
250.00 |
1,750.00 |
11.67 |
| 8 |
250.00 |
2,000.00 |
13.33 |
| 9 |
250.00 |
2,250.00 |
15.00 |
| 10 |
250.00 |
2,500.00 |
16.67 |
| 11 |
250.00 |
2,750.00 |
18.33 |
| 12 |
250.00 |
3,000.00 |
20.00 |
| 13 |
2,250.00
|
5,250.00 |
35.00 |
| 14 |
250.00 |
5,500.00 |
36.67 |
| 15 |
250.00 |
5,750.00 |
38.33 |
| 16 |
250.00 |
6,000.00 |
40.00 |
| 17 |
250.00 |
6,250.00 |
41.67 |
| 18 |
250.00 |
6,500.00 |
43.33 |
| 19 |
250.00 |
6,750.00 |
45.00 |
| 20 |
250.00 |
7,000.00 |
46.67 |
| 21 |
250.00 |
7,250.00 |
48.33 |
| 22 |
250.00 |
7,500.00 |
50.00 |
| 23 |
250.00 |
7,750.00 |
51.67 |
| 24 |
250.00 |
8,000.00 |
53.33 |
| 25 |
250.00 |
8,250.00 |
55.00 |
| 26 |
250.00 |
8,500.00 |
56.67 |
| 27 |
250.00 |
8,750.00 |
58.33 |
| 28 |
250.00 |
9,000.00 |
60.00 |
| 29 |
250.00 |
9,250.00 |
61.67 |
| 30 |
250.00 |
9,500.00 |
63.33 |
| 31 |
250.00 |
9,750.00 |
65.00 |
| 32 |
250.00 |
10,000.00 |
66.67 |
| 33 |
250.00 |
10,250.00 |
68.33 |
| 34 |
250.00 |
10,500.00 |
70.00 |
| 35 |
250.00 |
10,750.00 |
71.67 |
| 36 |
250.00 |
11,000.00 |
73.33 |
| |
Total
Interest: |
$1,430 |
| |
Total
Equity Withdrawn: |
$11,000 |
| |
Total
Owing: |
$12,430 |
After three years the amount of equity withdrawn is $11,000 with $1,430
in interest costs for a total of $12,430 owing at the time of the sale of
the house. |
