Home Equity and the Reverse Mortgage
Tuesday, January 27th, 2009 Subscribe To Our Feed
The reverse mortgage can be a fabulous tool to solve a financial issue and not be obligated monthly to repay the lender. The borrower simply needs to understand that it is a negative equity mortgage.
Naturally, the lender has to make money somewhere, so they do it at the end of the loan. Interest simply accrues on the principal loaned to the borrower. At the end of the mortgage, the lender recoups the investment and makes its 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.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
Accruing interest will definitely deduct from the equity in the home. On the other hand the natural progression of home values grows the borrowers equity.
Appreciation usually adds to the homes equity, even with interest accruing against it from the reverse mortgage.
Based upon the value of the home, a borrower will qualify for a specific amount of money, and most will not take all of this money. Instead, they will let a fair amount stay in a line of credit. This credit line doesnt accrue interest against the equity in the home.
But lets assume the borrower uses all of it immediately. Lets say the house is worth $200,000 and they qualify for $130,000. And they take it all out right now.
Basic math tells us interest will accrue and eat into the borrowers equity as fast as it can in this scenario. From the get-go, interest is accruing on $130,000.
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!
In the same example, lets say the borrower only used $100,000 immediately. In twenty years there would still be over $100,000 in equity. In the latter example the borrower actually had a net gain.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be.
About the Author: Contemplating the reverse mortgage or studying the California reverse mortgage goGet educated by clicking that link or this one leading to another great info site for the California reverse mortgage.
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