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Reverse Mortgage Loan

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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