Personal Investor: Reverse mortgages could backfire with higher rates – Article – BNN According to Dale Jackson
Reverse mortgages have been a godsend over the past two decades for many seniors who are short on investments and heavy on home equity. Skyrocketing house prices have allowed them to tap into the value of their homes for day-to-day living expenses.
But as interest rates rise they may find the burden of a reverse mortgage too heavy.
Here’s how a reverse mortgage basically works: Homeowners can borrow up to 55 per cent of the appraised value of their homes. The remaining equity is used by the lender as collateral. Payment for that loan isn’t due until you no longer live in the house, whether you move out, put the house up for sale, or you’ve died.
Higher mortgage rates mean higher interest payments. The big difference is a regular mortgage gets smaller over time, decreasing the amount of compound interest. With reverse mortgages, interest compounds in reverse – increasing the total debt as that interest generates more interest, and so on.
Like regular mortgages, reverse mortgages are available over many fixed time periods. However, the rates on reverse mortgages tend to be higher.