Reverse mortgage horror stories are often shared online, but are they legitimate? Are they relevant for Canadians? This article looks at the most popular reverse mortgage horror stories and explains why they're misleading.
Reverse Mortgage Basics
Reverse mortgages in Canada allow you to borrow up to 55% of your home's current value. Unlike other types of home equity borrowing, reverse mortgages only need to be repaid when you move out of your home, sell it, everyone on the title dies, or you default on the loan. Many horror stories revolve around defaulting on a reverse mortgage and losing your home, but this is both rare and difficult.
Reverse Mortgage Horror Story #1
One of the most viral reverse mortgage horror stories concerns an elderly Alabama woman whose home was foreclosed on because the lender deemed it unoccupied. However, the lender's inspector visited the vacant restaurant next door rather than the woman's home, which she was still living in. This situation is atypical and the woman eventually received significant compensation in court since the company was negligent.
Reverse Mortgage Horror Story #2
Another commonly-cited reverse mortgage horror story involves a Florida woman who lost her home after defaulting on a loan. The woman took out a reverse mortgage to cover the cost of home renovations, but the money was lost when a fraudulent contractor vanished with it. The woman fell ill and was unable to keep up with her home insurance premiums, property taxes, and homeowner's association fees. Her reverse mortgage went into default and she lost her home.
Should Canadians Worry About Reverse Mortgage Horror Stories?
Despite these horror stories, most reverse mortgage cautionary tales involve American homeowners and lenders, not Canadians. This is because Canadian mortgage lenders operate with much more restraint than their American counterparts. During the 2008 financial crisis, Canada did not experience a full-scale housing crisis and no banks failed. Critics of reverse mortgages are not against the idea itself, just the predatory practices of American lenders.
It's important to remember that reverse mortgage horror stories are rare in Canada. Lenders are more stable and ethical, and the government provides significant protection for borrowers. If you're considering a reverse mortgage, it's important to do your research and work with a reputable lender.
Reverse Mortgage Myths
Myth #1: A reverse mortgage means the bank owns your home.
This is not true. You continue to own your home, and the bank cannot force you to sell or do anything other than maintain the property as you would normally.
Myth #2: A reverse mortgage may result in owing more than your home is worth.
In Canada, reverse mortgages typically come with a guarantee that you will never owe more than your home is worth, as long as you fulfill your obligations as a property owner.
Myth #3: Reverse mortgages are only for elderly or financially struggling homeowners.
This is not true. Anyone who is at least 55 years old and owns a home can qualify for a reverse mortgage. There are even reverse mortgage lenders without an age limit.
Myth #4: Reverse mortgages are expensive and have high-interest rates.
Reverse mortgages have competitive interest rates, and the interest is deferred until the loan is repaid. There are some additional setup fees compared to a traditional mortgage but they are fair and reasonable.
Myth #5: You can't leave your home to your heirs if you have a reverse mortgage.
Your heirs can still inherit your home after a reverse mortgage, but they will need to pay off the loan in order to keep the property. Your children can pay off the reverse mortgage loan in any way they choose, including selling the property or using cash. They also have 6 months to settle the loan after your death.
Myth #6: A reverse mortgage is problematic for heirs.
Reverse mortgages typically end with the borrower and their family retaining over 50% equity in the home, which can still be a substantial inheritance.
Myth #7: You can't get a reverse mortgage if you already have a mortgage.
You can still qualify for a reverse mortgage if you have an existing mortgage, but the reverse mortgage must be used to pay off the existing loan.
Myth #8: Reverse mortgages are only for homeowners who are close to defaulting on their mortgages.
Reverse mortgages can be a useful financial tool for homeowners of any age and financial situation, and are often used by wealthy individuals to access the equity in their home.
Myth #9: You can't refinance a reverse mortgage.
You can refinance a reverse mortgage just like you could a traditional mortgage.
Myth #10: Reverse mortgage lenders are eager to foreclose on homes.
Foreclosing on a home is a complex process that requires the lender to go through the correct legal channels, and they have no incentive to do this unless it is their only means of being repaid.
Myth #11: You must make monthly payments on a reverse mortgage.
With a reverse mortgage, you do not have to make monthly payments as long as you continue to live in your home, pay your property taxes, and keep the property in good condition.
Myth #12: You can't access the equity in your home if you have a reverse mortgage.
A reverse mortgage allows you to access the equity in your home, if you need to access even more equity this could be possible with a second mortgage however the second mortgage would required at least interest-only payments.