Reverse mortgages are negative equity loans, in their purest form. They allow the borrower to take out a loan without the obligation of paying back the lender on a periodic basis.
The lender must have a financial gain somewhere along the line. This is done at the end of the loan, with the interest accruing on the principal amount loaned to the borrower. At this time the lender can get back the investment and make a profit.
The scary part for the borrower is the interest accruing so much that it eats away at all of the equity in the home. This is a fair thing to be concerned about.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. Ill cover the two main forces.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
Usually, normal appreciation will add to equity in a home, even with the reverse mortgage interest accumulating against it.
Most people qualify for a certain amount of money based upon the value of the home. Most dont take all of this money. Most let a good deal sit in a line of credit where it isnt accruing interest against the homes equity.
For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.
Right away, there is interest gathering on one hundred and thirty thousand dollars. Do the numbers and you will see that amassing interest will quickly take away from any equity in the home.
With a fixed rate of 6.09% building interest against the equity, and 4% appreciation, it will take over twenty years for the loan to gather enough interest to consume the equity!
Using the above example, say the borrower used only $100,000 of the loan initially. In 20 years there would still be over $100,000 left in equity! The borrower would actually have a net gain.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be. - 15224
The lender must have a financial gain somewhere along the line. This is done at the end of the loan, with the interest accruing on the principal amount loaned to the borrower. At this time the lender can get back the investment and make a profit.
The scary part for the borrower is the interest accruing so much that it eats away at all of the equity in the home. This is a fair thing to be concerned about.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. Ill cover the two main forces.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
Usually, normal appreciation will add to equity in a home, even with the reverse mortgage interest accumulating against it.
Most people qualify for a certain amount of money based upon the value of the home. Most dont take all of this money. Most let a good deal sit in a line of credit where it isnt accruing interest against the homes equity.
For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.
Right away, there is interest gathering on one hundred and thirty thousand dollars. Do the numbers and you will see that amassing interest will quickly take away from any equity in the home.
With a fixed rate of 6.09% building interest against the equity, and 4% appreciation, it will take over twenty years for the loan to gather enough interest to consume the equity!
Using the above example, say the borrower used only $100,000 of the loan initially. In 20 years there would still be over $100,000 left in equity! The borrower would actually have a net gain.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be. - 15224
About the Author:
Thinking about a HECM or studying the California reverse mortgage goget a good guide at former link or this link which leads to a great site in California regarding the reverse mortgage.
