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A reverse mortgage, as the name suggest is a loan wherein
the lender pays the borrower instead of the usual setup where
the borrower pays the lender as done in traditional regular
mortgages. To be very precise, a reverse mortgage is a home
equity loan that allows you to transform some of the equity
in your home into cash while you continue to hold the ownership
of your house.
To find out the equity of your home, it is mandatory for you
to calculate the difference between the appraised value of your
home and your outstanding mortgage balance. As your outstanding
balance reduces and/or property value increases, the equity
of your home increases and vice versa. reverse mortgage, that?s
why, is borrowing money relative to the amount of equity in
your home.
Unlike traditional home equity loans, most reverse mortgages
do not require you to pay principal interests and other fees
as long as you reside in your house. Furthermore there is no
restriction as to the use of your loaned cash from a converted
equity. What?s more the money can be used for anything like
education, travel, credit card debt etc. generally speaking
the lender could request that you pay a part of your converted
equity to pay off the balance of an existing mortgage.
Reverse mortgages can be termed as rising-debt loans. This clearly
emphasizes that unlike regular mortgages where the borrower
lowers his/her debt as he/she pays the lender, reverse mortgages
increases your debt as lender gives you more money. Since you
retain the title of your house, it is still your job to pay
for its maintenance, taxes, etc.
Remember that reverse mortgages are not suited for everybody.
In general those who usually avail of this are people who are
?house rich? but are ?cash poor?. In order to avail of a reverse
mortgage, first and foremost, you must own a house. Secondly,
you must be at least 60 years old. It is worthwhile pointing
that others allow only those who are at least 70 years old and
have a low income. Third, you must be presently residing in
your home and must have stayed there for a minimum of half a
year. Lots of reverse mortgages convert equities of homes that
are single-family units only, 1-to-4 unit building or a federally-approved
condominium. In case if your equity is not large enough to pay
off balance of your current mortgage, then, you are not qualified
to get a reverse mortgage. Plenty of reverse mortgages allow
only those who have paid existing debt. In case if you qualified
for a reverse mortgage for purposes of house repair, the cash
that will be gained must only be used for this purpose.
One possible risk of getting reverse mortgages is that the interest
is compounded. This depicts that you are paying interest for
both the principal and the interest, which has already accrued
each month. It is quite safe to say that you must not borrow
more than you need since most of your converted equity will
only be used to pay off your compounded interests.
Despite all these risks attached, reverse mortgages can be beneficial
especially to senior citizens who find themselves with a highly
valuable home but without cash. One advantage is that your debt
can never exceed the value of your home. In addition you can
use the converted equity to pay previous home debt. You will
be guaranteed with a monthly income without the requirement
to make payments for as long as you live in the house.
A lender?s promise of fast cash as well as no monthly payments
make reverse mortgages an attractive alternative for cash-strapped
seniors who are house-rich but cash-poor. Given to homeowners
over the age of 6o, reverse mortgages allow seniors to convert
the equity of their home to finance living expenses, home improvements
or other needs. It seems like a perfect idea, but it could cost
a fortune.
While they give distinctive advantages - such as allowing people
to stay in their home, getting a monthly income and maintaining
an enjoyable standard of living - reverse mortgages aren?t for
everyone and they involve a number of risks that should be taken
into consideration. In an ideal scenario a reverse mortgageis the opposite of a conventional mortgage. Instead of borrowing
money from a lender to purchase a home, the lender pays you
based on your home equity. It is of utmost importance that the
home must be your principal place of residence. In case if the
mortgagor (homeowner) dies, sells the home or otherwise changes
principal residence the initial loan must be paid back together
with accrued interest, usually through the sale of the property.
Because the proceeds of a reverse mortgage are termed more or
less as a loan rather than income, they are non-taxable.
In theory the mortgage principal amount is anywhere between
ten to forty percent of the home appraised value and is in direct
function of the borrower?s age, current interest rates and property
value.
With eighty percent of the average American seniors? assets
tied up in their home and little or no income, this can be a
viable financing tool for some people. On the other hand the
downside of a reverse mortgage, however, is that it can quickly
eat up the accumulated equity of the house. Let?s assume that
you take a $50,000 reverse mortgage today at the rate of five
percent. In that scenario you will owe $50,000 seven years from
now, double in fourteen years. Whereas for seniors who want
to leave one-hundred percent of their estate with heirs or who
hope to have a certain amount of equity leftover after re-paying
the mortgage, this type of financing may not be ideal.
When taking into account whether or not to take out a reverse
mortgage, it is important to understand the risks involved,
the types of reverse mortgages available and the different terms
offered by lenders. And remember that it never hurts to seek
the advice of a third party such as a lawyer prior to entering
into an agreement.
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