How Does a Reverse Mortgage Work?

Confused about how you can cut the high cost of living? As we age, one solution that many Ontarians choose is to use their home’s value to offset these costs. The Reverse Mortgage could be the answer for you. But how does it work?

Reverse Mortgage Confusion   

Just when you feel you understood how a normal mortgage works…in comes the Reverse Mortgage. This product is a real doozy with technical jargon like: negative amortization schedule, accumulative debt table, and compound interest…OH MY!

As much as you don’t want to let this confusion paralyze you, it is so important that you understand. And let’s make sure it is in words you can say back to your loved ones. Here is how a Reverse Mortgage works. 

The Reverse Mortgage – Breaking It Down 

The real question here is: How can I know if a Reverse Mortgage is for me if I don’t know how it works simply? Well it’s time to have your AHA moment. In fact, three AHA moments. And as these lightbulbs go on it will become crystal clear whether this is the product for you.

  1. You will no longer have a traditional mortgage – With a Reverse Mortgage you are trading what you are familiar with for a loan of your equity up to 55% of your home’s worth. 

Quick example: If your home is worth 800K today and you are looking at getting a Reverse Mortgage you can access up to 440K.

You may take all or part of this in cash, as a lump sum, or over time as a monthly income.

  1. You will no longer have to make monthly payments – This is a unique feature of the Reverse Mortgage. The amount you have borrowed and the length of time you have borrowed it for will determine the eventual cost of the loan. 

Quick example: Your loan was for 175K at 5.89% and you borrowed it for three years. You will now owe 206K if you have not made any payments.

There is always the option towards making the interest payments over the time you are borrowing the money to reduce the amount owing.

  1. The amount you borrow initially and over time will accumulate and the interest will compound – To keep this very simple, this loan gets more expensive the longer you have it. If you choose to not make any payments over the term then there will be interest on this as well.  

Quick example: The loan for 175K at 5.89% will effectively double after 12 years and you will owe 350K. And this is without taking any additional equity as income over this period of time.

Learn more about all the things you need to know about Reverse Mortgages.

Is A Reverse Mortgage Right For You?

Ultimately this decision is yours. I hope to have helped you understand the how and given you a couple of AHA’s along the way. 

It is vitally important to speak with an unbiased source of mortgage knowledge when making this decision. I offer the full range of borrowing options to my clients and help you make enlightened decisions.

And through enlightenment comes the confidence towards making a smart choice. Remember, you’ll still be able to do life your way – only better! Contact me today.