Reverse mortgages: Getting money out of your home in retirement
When people think about getting money out of their paid-off homes in retirement, reverse mortgages are usually the first thought that comes to mind.
A reverse mortgage is simply a loan that is secured by the equity you have in your home. It is designed for retirees who want to access some of the equity in their home to supplement their retirement lifestyle.
Essentially, a reverse mortgage lender gives you a lump sum of money based on an appraisal of your home. The amount of loan will likely be 25% to 40% of the value of your home depending on a number of different factors like your age, the appraised value of your home, and the location of your home (is it in a big city or rural?).
Instead of making payments on that loan, the interest costs simply accrue and grow. The reverse mortgage lender assumes that the value of the house will also grow in value, which ensures there is always equity in the home. The loan eventually gets paid off when you die or when you sell the home.
Having seen a few quotes, I think retirees need to tread carefully when it comes to reverse mortgages. Sure it’s appealing that you do not have to make payments but the costs in terms of fees and interest should make you think twice.
Line of credit
One alternative to a reverse mortgage is to use a home equity line of credit (HELOC) to achieve the same thing. With a line of credit, you can access up to 75% of the value of your home but the big difference is you will have to make payments of at least the interest. You will only have to make a payment but only on the amount borrowed.
With a line of credit, you will have so much more flexibility in terms of how you use the line of credit, when you use the money, and how much money you can access. You are also likely to pay fewer fees and get a lower rate of interest on the loan.
The problem is it requires a little more management and involvement than the reverse mortgage. I would draw some parallels to the RRIF and annuity options as retirement options for the RRSP.
When it comes time to retire and convert your RRSPs to income, you can choose between an RRIF or an annuity. The annuity is kind of like the reverse mortgage from the perspective that it requires very little management and decision making. The RRIF is like the Line of Credit in that you have maximum flexibility and more control over your money and assets.
In the end, I think the numbers will give you the best option. If you are looking to get equity out of your home in retirement, get a reverse mortgage quote and compare it to the option of a line of credit.
When it comes to RRIFs and annuities I would estimate that 95% of retirees choose the RRIF over the annuity. When you look at the reverse mortgage versus the line of credit, I think the numbers will likely lead more people to the line of credit. That being said, the reverse mortgage still has it’s placed just like the annuity will always have its place.
Comments
Hi Jim. I’m not sure when you originally posted this article. Today the majority of banks can only lend up to 65% on a secured line of credit. Local credit unions are exempt from these limiting rules but their rates for locs can tend to be a bit higher.
As an independent mortgage planner we often find seniors/retired folks tend to have a tough time qualifying for a loc. Many of these folks don’t consider it a ” do first ” thought prior to moving to a lower income bracket. When I work with clients I always ask about retirement goals, needs and income. It’s much more difficult once you are already on a reduced income to obtain a loc. The best thoughts are to plan and execute these ideas before your “Retirement tea/party.”
With respect to CHIP – reverse mortgages. They are becoming more competitively priced and certainly they offer much better options and pricing today than even a few short years ago. Clients can access borrowing as early as 55, rates are decent and you may draw more than once, and you may also make interest payments (and be rewarded for it – rate translation for subsequent terms). I think it’s certainly a better option for retirees that may not qualify for a mainstream line of credit than private or non prime equity lending.
Just my two cents.
Sharon Davis
Mortgage Planner/Partner
Innovative Mortgage Solutions -The Mortgage Centre
Thanks Sharon!
Great points
Thanks for stopping by
My opinion and attitude towar reverse mortgages was developed during that period mentioned above when it had a lot of negatives attached to the idea. It seemed that people were being ripped off somehow and ended up loosing their homes. This kinda soured me on the entire idea for many years. Now it has become fashionable again and have little to no risk involved of loosing ones fixed asset, the home, which is most important to everyone who has one. No risk can be associated with owning yr own home, when it comes to getting a loan through a financial institution, which are among the most corrupt institutitons in the entire free world.
I’m curious about the Seniors HELOC offered by Seniors Equity/intelliMortgage, founded by Rob McLister. Apparently it’s easier to qualify for than a bank HELOC and doesn’t necessarily require monthly interest payments (what they term “interest payment capitalization”) which makes it more like a reverse mortgage, but at an interest rate well below the CHIP rate (and somewhat below that of even some of the major banks). Does anyone know more about this product (and the company) both advantages and disadvantages?