Are you a homeowner over the age of 55 and worried about the rising costs of living? If you are, you are not alone. Living on a fixed income while expenses are going up can be stressful. To try and manage their monthly needs, many retired homeowners will consider getting a home equity loan.
Now, we know what you might be thinking. You've worked hard to pay off your mortgage, and taking on another loan with its monthly payments does not sound like a good idea. If you’re already feeling uneasy about your finances, how can more debt make sense? But what if we told you that a reverse mortgage could be the key to improving your mental and financial future?
In this blog post, we will compare home equity loans with reverse mortgages. We'll explore reverse mortgage features, debunk the myths, and show you how they can give you the financial relief you are looking for. Are reverse mortgages a better option than home equity loans for seniors? We think so!
Understanding Home Equity Loans
When you have a home equity loan, you are borrowing money and offering your home equity as collateral. The loan is typically repaid over a fixed period of time with regular monthly payments. Sounds simple, right? Well, let's take a closer look.
Exploring Traditional Options
Traditional home equity loans come in two primary forms: home equity lines of credit and second mortgages. Let's unpack each of these options:
Home Equity Lines of Credit (HELOC):
Think of a HELOC as a credit card tied to the equity in your home. A HELOC will have a limit you can borrow and you do not pay interest unless you use money from it. Plus you can use the funds for any reason. While this flexibility may sound appealing, there are potential pitfalls to consider. HELOCs often have variable interest rates, so your monthly payments can fluctuate as interest rates change. In the current rising interest rate environment, HELOC payments have risen dramatically and many borrowers have been caught off guard.
HELOCs loan amounts are also based on the borrower’s income levels. The more income you can show a lender, the more they will lend to you as a HELOC. Unfortunately, if you are retired and receiving pension income, most lenders will not approve you for a large HELOC amount. This can be very frustrating for seniors who think they can easily get approved for a HELOC because they own their home mortgage-free (or may only have a small mortgage).
A second mortgage involves taking out an additional loan on top of your existing mortgage. Second mortgages are usually obtained from smaller lenders who do not focus completely on your income levels. Getting approved for a second mortgage is quite easy if you have lots of equity in your home.
Home Equity Loan Risks
While traditional home equity loans may have benefits, it's essential to be aware of their risks and drawbacks. One significant drawback of traditional home equity loans is the requirement for monthly payments. These payments can strain your budget, especially if you live on a fixed retirement income. Also, if your financial situation changes, it can be challenging to meet these ongoing payment obligations. If a borrower fails to make the necessary payments on their home equity loan, the lender will eventually demand repayment. Borrowers need to be careful and repay quickly as the home equity loan is secured by their home.
Even if the home equity loan allows you to skip making payments, at some point the loan will come due—in the cases of a second mortgage, the loan will become due in a year. At that point, homeowners face a dilemma: how is the loan going to repaid? This dilemma can result in homeowners “rolling over” their home equity loan repeatedly, leading to more debt and the possibility of the homeowner having to sell their home in order to eventually pay off the loan. Is there a better option for homeowners?
We think so. In our opinion, a better solution for the overall problem is for older homeowners to seriously consider taking a reverse mortgage. This is a product designed specifically for retired homeowners and offers a game-changing solution that offers greater flexibility, financial security, and the ability to maintain your comfortable lifestyle. At RetireBetter, we have a team of dedicated, licensed mortgage professionals who are certified reverse mortgage specialists. We have helped more homeowners get reverse mortgages than anyone else since 2017.
We love the product and think its benefits are tremendous; so let's dive into those advantages and debunk their misconceptions because reverse mortgages are deeply misunderstood in Canada.
Introducing Reverse Mortgages
Unlike traditional home equity loans, reverse mortgages were designed for seniors who are retired or receiving lower income. Reverse mortgages allow you to convert a portion of your home's equity into tax-free cash without the need to make monthly payments. Yes, you heard that right—no more worrying about making those regular loan repayments. Instead, the loan is repaid when you no longer occupy the home, typically through the sale of the property. There is no need to repay (or renew) the loan at the end of a term, as was the case with home equity loans.
Think of a reverse mortgage as a financial tool that gives you the freedom to leverage your home's equity while still maintaining ownership and the right to live in your home for as long as you wish. It's like having your cake and eating it too!
Debunking Reverse Mortgage Myths
There is a lot of misinformation about reverse mortgages, especially with Canadian reverse mortgages. Many seniors have been discouraged to consider reverse mortgages because of the information they read online (which typically is almost always dealing with American reverse mortgages) or stories they hear from their friends. Let’s look at the common myths surrounding reverse mortgages in Canada:
Myth #1: Reverse mortgages strip you of homeownership.
This is 100% false. You always remain as the owner when you get a reverse mortgage. You retain the right to live in your home and enjoy the benefits of homeownership.
Myth #2: Reverse mortgages lead to negative equity.
Again, this is 100% false. While it's true that reverse mortgage loans accrue interest over time, the loan is structured to ensure you can never owe more than the value of your home. This protection, known as a non-recourse feature, shields you and your heirs from the risk of owing more than the home is worth.
Myth #3: Reverse mortgages leave nothing for your heirs.
In almost all cases, this is false. Reverse mortgage lenders are very careful not to lend you too much money. They will only lend you a reasonable amount based on your age, and a few other factors, to avoid the reverse mortgage becoming too large in relation to your property value. Based on our discussions with HomeEquity Bank (the largest reverse mortgage lender in Canada), more than 99% of all reverse mortgages leave an inheritance for the heirs.
The Benefits of Reverse Mortgages
Reverse mortgages offer unique advantages that can improve your financial security and quality of life. In this section, we'll explore the benefits of reverse mortgages.
Reverse Mortgages are Flexible
Imagine being free to choose how you want to access your home equity. Let's discover the various options reverse mortgage give you:
Lump Sum Cash Option:
Need a significant amount of cash upfront? A reverse mortgage allows you to receive a lump sum payment, providing immediate funds to cover significant expenses like home renovations, medical bills, or debt consolidation. With this option, you can immediately take care of your financial needs.
Line of Credit Option:
Want to have funds available whenever you need them? With this option, the reverse mortgage works like a HELOC. Interest is only calculated on the amount you borrow, and you can get approved for a larger amount because it is not based on your credit score or your income (which would be the case for a traditional HELOC). Your line of credit limit is determined after a home appraisal is completed. There is no payment schedule and your mortgage rate is a variable rate.
This type of reverse mortgage is the perfect solution to cover unexpected expenses and acts as a terrific option for those homeowners wanting a traditional HELOC solution.
Monthly Allowance Payments:
Looking for a steady income stream to supplement your retirement? Don’t want to receive all your funds at once? With this type of reverse mortgage, you can receive monthly payments, providing a reliable source of tax-free funds. This option is like have a customized pension plan tailored to your needs, ensuring financial stability throughout your retirement.
By spreading out your borrowing over time, you can reduce the long-term interest costs of a reverse mortgage. With all of these options, it’s easy to see how you can use a reverse mortgage to best meet your financial goals and lifestyle. Whether you prefer a lump sum for immediate needs, a line of credit for flexibility, or monthly payments for ongoing income, the choice is yours.
Best Uses of a Reverse Mortgage
Retirement should be a time to enjoy life, not worry about finances. Retirement is not the time to suddenly earn more income or eliminate all costs. In the previous section, we began to suggest how the flexibility of reverse mortgages can give you several benefits, such as meeting your financial goals and lifestyle needs. In this section, we’ll share the best ways to use a reverse mortgage:
Supplementing Retirement Income:
A reverse mortgage can provide a steady income stream, supplementing your existing retirement funds and allowing you to live comfortably in your own home. Whether it's covering daily expenses, healthcare costs, or leisure activities, the extra income can bring peace of mind and financial security. Again, you can choose how much you want to receive and how frequently. You can receive it all at once or spread out over time.
Improving Cash Flow:
Do you find yourself struggling with cash flow? Reverse mortgages can alleviate financial stress by allowing you to meet your financial obligations every month and enjoy your desired lifestyle comfortably.
Ageing in Place:
Ageing in place is the ultimate dream for many seniors. We have never met a retired homeowner who is looking forward to selling their home and moving into a nursing home. Ageing in place is about living your final years with dignity, privacy and safety in your own home. Preparing the home for your elderly needs or paying for in-home care can be daunting for many homeowners. With a reverse mortgage, this wish can become a reality.
Staying in your home as you age brings practical advantages. Essential services are within reach, making accessing healthcare, transportation, and social opportunities easier. You can maintain your routines and daily habits, fostering a sense of stability and familiarity.
Aging in place isn't just about physical surroundings; it's about preserving your autonomy, maintaining a sense of purpose and staying mentally positive. With a reverse mortgage, your home becomes a haven where you can thrive and enjoy the lifestyle you've built over the years. We are seeing more clients than ever before use a reverse mortgage to age in place and expect this to become the biggest reason going forward.
Who Can Get a Reverse Mortgage
Reverse mortgages have specific eligibility criteria, including age requirements (typically 55 years or older), occupancy rules, and the type of property eligible for a reverse mortgage. Your credit score is not important; neither is your income level. In order to get a reverse mortgage, your home must be worth at least $250,000 and in livable condition. You must have enough income to pay your property taxes and home insurance.
Aside from these requirements, anyone who is retired in Canada can enjoy the advantages of a reverse mortgage.
We know that people gravitate towards familiar ideas. That is why Canadian homeowners continue to use home equity loans to address their needs in retirement. We hope this discussion will help you see that home equity loans are not the best option for retired homeowners and perhaps start to view reverse mortgages in a different light. The unique features, benefits, and safeguards of reverse mortgages make them a powerful tool for older Canadians to secure their financial well-being and maintain a comfortable lifestyle.
By opting for a reverse mortgage, seniors can tap into their home's equity without the stress of making monthly mortgage payments. Instead, they have the flexibility to choose between receiving a lump sum, setting up a line of credit, or receiving monthly payments, depending on their specific needs and goals. Contrary to common misconceptions, reverse mortgages allow seniors to maintain ownership of their homes and age in place—a dream scenario for many. The emotional and practical advantages of staying in familiar surroundings, being connected to the community, and having essential services within reach cannot be overstated.
If you have any questions or need personalized guidance, don't hesitate to contact us at RetireBetter. As reverse mortgage specialists, we can guide and support you through the entire journey to make it as smooth and stress-free as possible.