Today, reverse mortgages are a popular means for individuals who are over 60 to tap into the equity of their home. Reverse mortgages allow homeowners to keep their principal residence and at the same time not incur any additional debt. Money from a reverse mortgage can be used for a variety of reasons, including: home improvements, supplementing retirement funds, or helping with healthcare expenses.
How does a reverse mortgage work?

Contrary to a regular mortgage where the homeowner makes monthly payments to a lender, with a reverse mortgage, the homeowner receives money from the lender. This loan is required to be paid back when the owner dies, sells their home, or no longer occupies the property as their principal residence.

The biggest advantage of reverse mortgages is it helps homeowners who are cash poor but equity rich stay in their homes and maintain their current lifestyle.

To qualify for a reverse mortgage, you have to be of a certain age (typically over 60) and you must live in your own residence. The proceeds are typically tax-free (as illustrated later in this article) and most reverse mortgages have no income restrictions.
Reverse mortgages have been around for 50 or more years in the United Kingdom, 20 plus years in the USA, and over 10 years in Canada.

When a reverse mortgage was first introduced, the typical profile of an applicant was someone who was "house rich, but cash poor." Today, however, this classification makes up only about 20% of reverse mortgage clients. Now-a-days, more than 50 percent of people taking advantage of reverse mortgages are using them for "extras in life". For example, they may want to buy an additional car, take a dream vacation, or upgrade their kitchen, etc. Additionally, some seniors are using reverse mortgages to help their children and grandchildren with an "early inheritance.”

One of the major advantages of reverse mortgages is the tax benefits. If an individual was using Guaranteed Investment Certificates (GIC's) for an income flow began receiving money from the annuity income of a reverse mortgage, such a replacement would eliminate a taxable income stream (GIC's) with a virtually non-taxable income stream. This is because Revenue Canada has ruled that while income from a Canadian Home Income Plan Reverse Mortgage is taxable, the interest expense that accrues is deductible. This deduction would typically negate the tax liability.

What are the disadvantages of a reverse mortgage?

One of the disadvantages of reverse mortgages is lender fees. In most cases, the fees associated with reverse mortgages are high. Although they are often times rolled into the loan and not paid upfront, in the end, reverse mortgages can cost several thousand dollars more than a conventional mortgage.

For this reason, it is important to carefully calculate the cost of a reverse mortgage against what you stand to gain because once you enter into an agreement for a reverse mortgage with a lender, they in essence have a stake in your property.

Also make sure you get sound advice before entering into a reverse mortgage. You may want to talk to your lawyer or to your financial advisors.

If it is an older family member who is considering a reverse mortgage, make sure they are of sound mind. Sometimes, an influx of sudden cash can result in regrettable, impulsive behavior. Also, the homeowner can be victims of some sort of scam.

A home is, typically, an individual’s most prized asset and a reverse mortgage basically creates a vehicle for you to spend your hard earned money. If you are not careful, this tool can cause financial hardship by unnecessary overspending.

Reverse mortgages are a great vehicle for seniors to tap into their otherwise unavailable equity. If used properly, reverse mortgages can allow an "older" individual to live with a continued high-standard of living. However, there are risks that need to be carefully assessed before anyone commits to a reverse mortgage. I hope this article helps shed some light on reverse mortgages.