Understanding Reverse Mortgages and Home Equity
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.
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.
Remember though, several energies are working here. Some devour equity and other, more homeowner-friendly energies give to it.
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.
Borrowers are eligible for a specific monetary amount based on value, age and interest rates. Most dont use this entire amount. The reason is by not pulling it out of the line of credit it doesnt amass interest against the equity.
As an example, we will have the borrower decide to use all of the money right away. His house is worth $200,000, and the borrower qualifies for $130,000.
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.
If interest accrues at 6.11% (this is close to where it is currently), and the home value grows at 4% (national average), it will take over twenty years for the loan to build up enough interest to eat away the entirety of the homes 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.
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.
Remember though, several energies are working here. Some devour equity and other, more homeowner-friendly energies give to it.
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.
Borrowers are eligible for a specific monetary amount based on value, age and interest rates. Most dont use this entire amount. The reason is by not pulling it out of the line of credit it doesnt amass interest against the equity.
As an example, we will have the borrower decide to use all of the money right away. His house is worth $200,000, and the borrower qualifies for $130,000.
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.
If interest accrues at 6.11% (this is close to where it is currently), and the home value grows at 4% (national average), it will take over twenty years for the loan to build up enough interest to eat away the entirety of the homes 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.
About the Author:
Thinking about a HECM or boning up on the California reverse mortgageget a good guide at former link or this link which leads to another great info site for the California reverse mortgage.
posted by Debt Consolidation Loan at
5:45 AM
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