Reverse Mortgages: Getting money out of your home in retirement
Written by Jim Yih
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 ensure 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 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 less 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 a 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 place just likne the annuity will always have it’s place.