Reverse Mortgage Uno
Certain jargon is out there—you hear it a bunch of times, and before you know it, you have no idea what a phrase means.
This can happen during a meeting, where you’re presumed to know the phrase or term in question. When the conversation has gone far enough, it starts getting really awkward to admit that you don’t know something, especially since the other person thought you knew.
I was encouraged from an early age to showcase my intelligence and hide my ignorance. The fear of appearing uninformed often overpowered the desire to learn.
While it’s not nearly as awkward when you’re not in the middle of a conversation and don’t know jargon, it can still be frustrating to hear a phrase for a number of years and not really know what it means.
Cat out of the bag here: I’m talking about reverse mortgages.
Homer, you are not alone, buddy. This is a topic that intersects with a variety of subjects people often find icky. Finance seemed so dirty and unappealing to me as a kid that I probably shot myself in the foot with a lack of proper financial preparedness in my 30s (frugal as I was, I was missing a lot of balance).
Still, the more I’ve learned, the more I’m glad I’ve learned. Being able to learn about nearly anything you’re curious about is pretty damn cool.
Ok, reverse mortgages are contracts that let you take money out of your house while you continue to live in it.
You’re thinking: my house is not a piggy bank; how can I take money out of a structure made of wood, brick, and glass? Do I like cut pieces of it off and sell them?
Well, no. You know how a standard mortgage involves borrowing a lot of money from a bank, then paying it off over time (plus interest)? Well, a reverse mortgage means you will let the bank borrow your home, so to speak, while you continue to go about your business of living in your home.
That’s not entirely accurate. The bank actually securitizes their loan with your home, but the bank doesn’t really own more of your home. Of course, if you don’t pay it back with cash, they really will own a chunk of your home when it’s all said and done.
Say your home is worth the median home price in the US—call it $400,000. You own your home outright through a decade of careful payments, or through inheritance, or whatever—but it’s all yours.
However, you need money. You’re retired and don’t have a ton of income, but you’ve got expenses. So, you let the bank say they own the house in order to generate an extra, say, $1200 a month. That helps you pay your bills since you’re retired, or otherwise in a position to need cash.
Basically, the bank is slowly buying your home from you in this scenario, just like you’d slowly acquire a house over a typical 30-year (non-reverse) mortgage. After ten years of these $1200 monthly payments, the bank now owns a significant chunk of your home—maybe about half, depending on mortgage rates.
The loan the bank made to you has to be paid back, but it’s being paid back with your house, not with your cash.
The value of your home can sometimes matter more than the prevailing interest rates. If your property value goes up by a ton during that ten year period, you’ll still own more than half of your home, but if the price goes down, you’re not going to be left with much at the end.
By the way, "more than half” might not be 100% accurate depending on rates and price appreciation, but I’m doing my best to make this simple and tangible.
How'd I do?
Another option is getting a home equity line of credit (HELOC). This give access to your equity for an emergency or necessary purchase or repair.
I would not use it for a monthly withdrawal to meet a negative cash flow.
But if one has other savings or investments, the HELOC can be accessed as quick as writing a check, and it doesn’t interrupt longer term savings or investments like an IRA, etc.
Usually, I talk to my father about this stuff, since he knows it well. But I don't think Canadian banks practice it much because it's never come up in our talks.