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Thursday, January 1, 2009
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.
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.
A fear the borrower may have is the interest amounting to so much that it consumes all of the equity in the home. This is something to be conscious in your investigations.
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 will definitely deduct from the equity in the home. On the other hand the natural progression of home values grows the borrowers equity.
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.
The one hundred and thirty thousand dollars will immediately begin to build interest. In this example, you can see how that interest will compound rapidly, taking away from the equity.
With a 6.125% fixed rate (very close to the current rate) accruing interest against the home, and 4% national average house appreciation, it takes over twenty years for the loan to accrue enough interest to eat away at all of the homes 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.
Most people dont take into consideration how powerful home appreciation can be, especially when looking at the negative side of the reverse 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.
A fear the borrower may have is the interest amounting to so much that it consumes all of the equity in the home. This is something to be conscious in your investigations.
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 will definitely deduct from the equity in the home. On the other hand the natural progression of home values grows the borrowers equity.
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.
The one hundred and thirty thousand dollars will immediately begin to build interest. In this example, you can see how that interest will compound rapidly, taking away from the equity.
With a 6.125% fixed rate (very close to the current rate) accruing interest against the home, and 4% national average house appreciation, it takes over twenty years for the loan to accrue enough interest to eat away at all of the homes 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.
Most people dont take into consideration how powerful home appreciation can be, especially when looking at the negative side of the reverse mortgage.
About the Author:
Thinking about a HECM or studying the California reverse mortgage goGet educated by clicking that link or this one leading to an excellent informational source for the California reverse mortgage.
posted by Credit Counseling at
5:43 AM
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