Reverse Mortgage Comparisons
Reverse Mortgage v.s. Home Equity Line Of Credit
A question that is often asked when discussing a reverse mortgage that involves choosing between that or a Home Equity Line Of Credit (HELOC for short). To begin, it is known that a HELOC has it's disadvantages: you are required to make the monthly interest payments, you could still lose your home if you do not keep up payments, and you could end up owing more than what your house is worth in the event of a housing market crash. The advantage to a HELOC is that it doesn't deminish the equity of your home. We have a solution for those who want to learn more, read our article on Reverse Mortgage vs HELOC (Home Equity Line Of Credit).
Reverse Mortgages are Different in Canada vs. The U.S.
Have you read somewhere that the age to qualify for a reverse mortgage is over 62? Have you been reading about terms such as HUD, HECM (Home Equity Conversion Mortgage), AARP, FHA or Churning? All of these items only relate to the US reverse mortgage and not the Canadian reverse mortgage.
While both Canada and the U.S. have a reverse mortgage product – and in fact are the only 2 countries in the world to refer to the product as a ‘reverse mortgage’ – how they operate and the rules and laws behind them can be very different and can present unique challenges when trying to explain them to the newly acquainted. Reverse mortgages in both the U.S. and Canada have been around for over 30 years. While sometimes called Home Equity Conversion Mortgage (HECM) in the U.S., they are not referred to this as much any more. In Canada, the product used to be called the ‘Canadian Home Income Plan’ or ‘CHIP’ – before being re-branded to the ‘CHIP reverse mortgage’. While they both have the same idea – giving seniors access to their home equity – in the U.S., qualifying is very different:
Differences Between Canada And The U.S.
- At least one spouse must be over 62 years old, whereas in Canada this is 55 for both applicants.
- In the U.S. only one spouse needs to qualify; in Canada both need to qualify. This is a very important differentiation and is part of the reason reverse mortgages have a very bad name in the USA – we’ll talk more about this below.
- In Canada, applicants must obtain independent legal advice before being approved – this is not required in the U.S.
Another major difference between our two countries is that the closing costs (the fees associated with setting it up) in the U.S. tend to be much higher, as well as there are ongoing fees such as servicing fees.
This takes us to similarities between reverse mortgages in the U.S. and Canada
- In both the U.S. and Canada, you are limited as to how much equity you can take out of your home (55% in Canada).
- To receive the funds, any current outstanding mortgages, outstanding property taxes, or other loans against the home must be paid out. You can use the reverse mortgage funds to pay these debts through the lawyer. Any proceeds after paying these off you keep.
- You never have to make monthly payments towards the reverse mortgage.
So you can see how the idea behind reverse mortgages in the U.S. and Canada is the same – give seniors access to the equity they have built up in their home so they can use the funds during their retirement. But beyond that, the similarities start to disappear. The way reverse mortgages are structured in Canada gives borrowers more protection and prevents cases of people losing their homes as was the case in the U.S. prior to 2014.
If you are thinking about getting a reverse mortgage in Canada, we can assist you.