Understanding Reverse Mortgage
A reverse mortgage is a loan that has been created for homeowners 55 years of age and older and both you and your spouse have to be this age or older. A reverse mortgage is approved because lenders consider the equity in your home. The equity in your home is the amount of money you have available from your home that is debt-free, in other words, the amount of money you have already paid towards your home over the years. A reverse mortgage was designed to give homeowners the opportunity to obtain cash, without having to sell their home. For example, if you are eligible for a reverse mortgage, you stop making monthly mortgage payments on your home and you begin, depending on the arrangement, to receive money from the equity of your home. You either receive a lump sum, several lump sums or monthly installments of cash. However, this loan needs to be explained in terms of interest the homeowner pays on the loan they receive. Often times the interest is a high interest rate and this accumulates very quickly over the years. Homeowners over the age of 55 need to ask the right questions because this could easily be a loan for decades. The interest comes from the equity of your home and thus could end up using up all equity you have in your home—leaving you with no home ownership and no equity as a result.
If you are approved for a reverse mortgage you are not required to make any payments on a reverse mortgage—this is one of many major differences compared to a regular mortgage. As mentioned in Understanding Reverse Mortgage Part 1, you are required to pay interest on your reverse mortgage. The interest on your reverse mortgage accumulates, and the equity or money you have paid into your home decreases with time. It is important to understand that if you sell your house or your home is no longer your primary residence, you must repay the reverse mortgage loan and any interest that has accumulated. In sum, it is important to understand the amount of interest you are paying, if that interest rate is fixed, and compare this interest to other types of loans, if you truly need a loan. It is possible your reverse mortgage loan sum can be up to 55 percent of the current value of your house—depending on the value of your house, this could be a substantial amount of money you are paying interest towards. Remember, if you are approved for a reverse mortgage, you must pay off any outstanding loans that are approved and secured by your home with the funds you receive from your reverse mortgage. Mortgage is due when you pass away, move out of your home permanently or decide to sell your home.
Reverse mortgages are growing in popularity because baby boomers are in the retirement age bracket and interested in more cash flow. Why is this type of loan becoming more popular? Because lenders are counting on the fact that people do not question increased interest rates and compound interest rates. Remember, reverse mortgage interest rates are higher than average interest rates. These rates range from 4 to 12 percent and you need to keep in mind there are fees you need to pay and closing costs. These costs also have a huge range anywhere from $3,000-$12,000 depending on the lender and agreement. Because the interest compounds on the reverse mortgage, the mortgage grows at an alarming rate. For example, if you borrow $200,000 at 6 per cent, because no regular payments are necessary, after 10 years you will owe $320,000 and the total is more (over $30,000 more) when you factor in semi-annual compounding. In other words, you are paying over 150,000 of your money in addition to the $200,000 you have to pay back—this is almost double the amount of the original reverse mortgage loan. When you die or sell your home that money will have to be repaid, leaving less cash for your home equity–you have cheaper options…and need to research your options and try not to talk to a reverse mortgage lender about the appropriateness of this type of loan. Talk to financial advisors in your community, family and friends. In other words, talk to people who do not have a vested interest in your mortgage or financial decisions.
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