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.
Remember though, several energies are working here. Some devour equity and other, more homeowner-friendly energies give to it.
Certainly the accruing interest cuts into the borrowers equity. Conversely, real estate appreciation greatly slows this process.
In most cases normal real estate appreciation adds to the homes equity, even with the accrual of interest against the home from the reverse mortgage.
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.
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!
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.
Most people dont take into consideration how powerful home appreciation can be, especially when looking at the negative side of the reverse mortgage.
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.
Remember though, several energies are working here. Some devour equity and other, more homeowner-friendly energies give to it.
Certainly the accruing interest cuts into the borrowers equity. Conversely, real estate appreciation greatly slows this process.
In most cases normal real estate appreciation adds to the homes equity, even with the accrual of interest against the home from the reverse mortgage.
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.
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!
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.
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 a California reverse mortgage (aka HECM)get a good guide at former link or this link which leads to an excellent informational source for the California reverse mortgage.
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