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5 Situations a Reverse Mortgage is a Good Idea

iQuanti: With rising home prices, homeowners may find themselves feeling pretty wealthy

iQuanti: With rising home prices, homeowners may find themselves feeling pretty wealthy. But when it comes to the retirement years, being house rich and cash poor can cause significant issues with covering expenses. It’s times like these that a reverse mortgage may be a good option. If you’re considering taking out a reverse mortgage, here are five instances it might be a good idea.


1. When you’re committed to living in your home during retirement 


One of the requirements for eligibility for a reverse mortgage is that you live in your home as the primary residence at least six months out of the year. If you’re committed to being in your home for your retirement years, it could make sense to use a reverse mortgage to help with cash flow. As long as you don’t sell your home or move, you won’t need to pay a dime toward the mortgage or principal.


2. When you need extra cash flow to cover daily expenses 


Sometimes retirement revenue sources, like savings, Registered Retirement Savings Plan (RRSP), Canada Pension Plan (CPP), and Old Age Security (OAS), simply aren’t enough. Since reverse mortgage loans are issued tax-free, they won’t have any bearing on how much you can receive from government entitlement plans. In addition, the flexibility of a reverse mortgage means you can choose to receive regular monthly payments that can act as an ongoing source of income during retirement. 


3. When your credit score doesn’t qualify you for other types of loans 


A home equity line of credit (HELOC) and home equity loan are popular alternatives to a reverse mortgage because they still use the equity in your home as collateral, but often with lower interest rates. If you have a credit score below 600, you may not be eligible for home equity loans or HELOCs with the best rates. In that case, a reverse mortgage may be able to help.


4. When you need to pay for an emergency and don’t want to tap investments that are doing well 


There are times you could get hit with a sudden medical bill or car repair, and you simply don’t have the cash on hand to cover. Instead of dipping into a retirement plan that’s performing well in the market, you could choose to take out a reverse mortgage to cover the cost. That way, your other retirement savings can continue earning money at a consistent rate.


5. When you want to give an early inheritance to your children 


Many Canadians 55+ plan to leave their homes as an inheritance for their kids or grandkids. However, if there is a financial need that arises while you’re still alive, say buying a home or starting a new business venture, a reverse mortgage could help provide them with cash from their inheritance early. Then, after you pass, the proceeds from the house sale will need to cover the reverse mortgage, and heirs will receive what’s leftover as their inheritance. 


The Bottom Line


Before committing to a reverse mortgage, it makes sense to discuss the idea with a financial professional. The right advisor can assess your reasons for wanting a reverse mortgage and confirm whether it makes good financial sense to get one. Then, if you decide to pursue the reverse mortgage, it’s important to discuss it with loved ones, specifically your next of kin. Since they’ll likely be responsible for making sure the reverse mortgage is paid, it’s beneficial to be candid ahead of time.


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