Reverse mortgages allow the borrower to take out a loan without having to pay back the lender on a monthly plan. However, its not without its shortcomings, and equity can get eaten up.
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.
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.
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.
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.
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.
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.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be.
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.
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.
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.
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.
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.
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.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be.
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Contemplating the reverse mortgage 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.
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