For a retiree, a reverse mortgage can be appealing as a powerful source of funding for people who need to increase their income to be comfortable during retirement.
In general, the greatest personal asset most retirees possess is their home. More often than not, a retiree’s home is paid off at the time of retirement. A reverse mortgage is simply a way to increase income without increasing monthly payments and allows a retiree to stay in his or her home and keep up with monthly bills and expenses.
There are countless articles written by financial institutions promoting the positives of reverse mortgages, but I believe it is important to be well informed and know the pitfalls!
Among the pitfalls of a reverse mortgage, one of them is the costs involved. As we know, all mortgages have costs and fees involved but reverse mortgage fees, which can include the interest rate, an application fee, home appraisal fee, costs for independent legal advice, and various other closing costs. These costs are very high when compared with a traditional mortgage. Costs vary but can be in the thousands. This cost is not paid out of pocket but rolled into the reverse mortgage loan.
In addition, there is a lack of options when choosing a reverse mortgage. The two companies in Canada that offer reverse mortgages are Canadian Home Income Plan (CHIP) and Seniors Money Canada.
Consider alternatives such as lines of credit or loans. Due to start up fees and higher rates of interest, reverse mortgages are more costly than conventional lines of credit or mortgages. Early payment of all or a portion of the amount borrowed could subject you to prepayment penalties.
Providers of reverse mortgages tend to market the benefit of using one to increase savings by shifting wealth from your home to your investments. This form of leverage adds risk. The reverse mortgage will almost always decrease the equity in your home, which will leave less money to your heirs.
While a reverse mortgage is definitely an option for retired seniors, it’s always important to be well informed, and be aware of all pros and cons!