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Borrowing Against Equity: Everything You Need To Know About Reverse Mortgages

Borrowing Against Equity: Everything You Need To Know About Reverse Mortgages

Older couple taking to mortgage broker about Reverse Mortgages

When it comes time to retire from the workforce, it can bring on mixed emotions. What should be a time of celebration and relaxation can often be overshadowed by worries and financial stress. Taking a big loss in income can take its toll on your lifestyle and your financial freedom. However, with the help of a reverse mortgage, you can not only give yourself some extra cash flow, it can also give you peace of mind with a line of credit to fall back on, should unexpected expenses turn up. Let’s take a look at just what a reverse mortgage is and how it can help you financially during your retirement.

“What Is A Reverse Mortgage?”

A reverse mortgage is exactly what it sounds like it. A lender will allow a homeowner to use the equity built up in their home, provided they have paid off their mortgage or made severe headway, as leverage for a loan or line of credit in retirement. Essentially, a percentage of what you would receive on the sale of your home is given to you as an advance, and you would be paid back the amount owning when you sell your home, whenever that may be later on down the line.

“Who Can Apply?”

Typically anyone over the age of 62 who owns their home, and has paid off their mortgage loan or has little left on the loan can apply. A reverse mortgage applicant does not necessarily have to be retired, though some lenders do require some financial counseling to ensure the borrower understands the legalities of the agreement, a reverse mortgage is fairly straightforward to obtain.

“How Much Can I Borrow?”

The amount given on a reverse mortgage is determined by several factors. For example, things such as age, appraised value of the property, remaining mortgage loan and the interest rate at the time of the closing of the reverse mortgage all play into how much a borrower will be loaned. An easy way to quickly get a ballpark calculation is by following a simple guideline. With recent interest rates, a 65-year-old, with a paid mortgage, can borrow up to 60% of their home’s equity, a 75-year-old can borrow up to 70%, and so on. While limitations can be put in place and vary from province to province and case to case, this ratio stands to be fairly typical.

“What Can I Use The Money Towards?”

Believe it or not, reverse mortgages hold no restrictions as to how the money can be used. Whether it is used as a line of credit as a fallback during retirement or as a quick lump sum to help with expenses, the money can be used as the borrower sees fit for their needs.

“How Do I Receive The Money?”

There are several ways a borrower can choose to receive their reverse mortgage loan once they have been approved. One choice is a line of credit. This option is great if you are using your reverse mortgage as a fallback, as you can tap into the money any time you like, with withdrawals for as much or as little as you need. Although be warned, some lenders do charge a small fee to keep the line of credit open, whether it is being used or not.

Secondly is a lump sum. As the name suggests, a borrower can receive the loan in one big payout and use it accordingly. The downside to this form of payment is that if you don’t have solid financial habits you could end up burning through it faster than you’d hoped.

There is also the option of a tenure plan. This is an ideal choice for anyone using their reserve mortgage as a supplementary income, as it gives you fixed monthly amounts for as long as you occupy the home of which you are borrowing equity against.

Lastly, there is a combination. This type of payout gives you a lump sum of a set amount, to begin with, then trickles into monthly payouts from a set date after that. Receiving your reverse mortgage this way is great for making a deposit on something like a car or vacation home, and then having the monthly payments covered by monthly deposits from your lender.

“When Do I Repay The Loan?”

The beauty of repayment on a reverse mortgage loan is that the time frame is indefinite. As long as you occupy your home, you do not have to pay back the loan. Once you vacate the home, the profits equal to the equity you’ve borrowed after the sale goes to your lender, and you are responsible for any shortcomings, should the value of your home decrease. Another great aspect is that reverse mortgages typically carry a low rate of interest.

Retirement should be a time of relaxation, not financial stress. Using your home’s equity as a platform to borrow against is a great way to keep your worries down, and your expenses covered. If you have any questions about whether or not applying for a reverse mortgage is right for you, don’t hesitate to give me a call at 705-315-0516. I am always happy to help you better understand your retirement options and to help you turn your financial worries into freedoms.

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