Home Equity and the Reverse Mortgage
The reverse mortgage can be a fabulous tool to solve a financial issue and not be obligated monthly to repay the lender. The borrower simply needs to understand that it is a negative equity mortgage.
At the end of the mortgage is when the lender recoups the investment and makes a profit. Interest simply compounds on to the principal loaned to the borrower.
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.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
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.
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.
But lets assume the borrower uses all of it immediately. Lets say the house is worth $200,000 and they qualify for $130,000. And they take it all out right now.
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 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!
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.
At the end of the mortgage is when the lender recoups the investment and makes a profit. Interest simply compounds on to the principal loaned to the borrower.
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.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
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.
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.
But lets assume the borrower uses all of it immediately. Lets say the house is worth $200,000 and they qualify for $130,000. And they take it all out right now.
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 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!
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.
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 an excellent informational source for the California reverse mortgage.
posted by Debt Consolidation Loan at
5:44 AM
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