Home Equity and the Reverse Mortgage
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.
As a potential borrower one thing to be naturally concerned about is the interest accruing to such an extent that all of the equity in the home vanishes.
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.
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.
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.
Continuing the example above, lets say the borrower only used one hundred thousand dollars right away. Twenty years from now, there would still be equity of over $100,000.
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.
As a potential borrower one thing to be naturally concerned about is the interest accruing to such an extent that all of the equity in the home vanishes.
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.
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.
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.
Continuing the example above, lets say the borrower only used one hundred thousand dollars right away. Twenty years from now, there would still be equity of over $100,000.
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 a good guide at former link or this link which leads to a great site in California regarding the reverse mortgage.
posted by Credit Counseling at
5:03 AM
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