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.
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.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. Ill cover the two main forces.
Certainly the accruing interest cuts into the borrowers equity. Conversely, real estate appreciation greatly slows this process.
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.
For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.
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!
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.
In conclusion, most people dont usually take into account how useful home appreciation can be, especially when regarding the negative side of the reverse mortgage. - 16928
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.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. Ill cover the two main forces.
Certainly the accruing interest cuts into the borrowers equity. Conversely, real estate appreciation greatly slows this process.
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.
For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.
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!
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.
In conclusion, most people dont usually take into account how useful home appreciation can be, especially when regarding the negative side of the reverse mortgage. - 16928
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.
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