Reverse Mortgage
Explained
Can't remember how many times I've been asked
"What is a reverse mortgage"? Reverse mortgages
are a great way to get a loan using your primary
asset. As in all cases of financial lending, the
flexibility comes at a price. A reverse mortgage
is a loan using your house and is referred to as
a “rising debt, falling equity" kind of deal.
To compare reverse mortgage to a more
traditional one, the type of mortgage commonly
used when buying a house can be classed as a
“forward mortgage”. To qualify for forward
mortgage, you must have a steady source of
income. Because the mortgage is secured by the
asset, if you default on the payments, your
house can be taken from you. As you pay off the
house, your equity is the difference between the
mortgage amount and how much you’ve paid. When
the last mortgage payment is made, the house
belongs to you.
On the other hand a reverse mortgage process
doesn’t require that the applicant have great
credit, or even that they have a steady source
of income. The major stipulation is that the
house is owned by the applicant. Generally,
there is also a minimum age required as well,
the older the applicant, the higher the loan
amount can be. As well, reverse mortgages must
be the only debt against your house.
Differing from a conventional “forward
mortgage”, your debt increases along with your
equity. Instead of making any monthly payments,
the amount loaned has interest added to it -
which eats away at your equity. If the loan is
over a long period of time, when the mortgage
comes due, there may be a large amount owed.
Furthermore, if the price of your home
decreased, there may not be any equity left
over. On the flip side, if it was to increase,
this could allow for an equity gain, but this
isn’t typical of the marketplace.
When deciding how to draw money from the reverse
mortgage, there are a few options; a single lump
sum, regular monthly advances, or a credit
account. There are conditions in this kind of
mortgage that would warrant the immediate
repayment of the loan; the mortgage will be due
when the borrower dies, sells the house, or
moves out.
Failure to pay your property taxes or
insurance on the home will undoubtedly lead
to a default as well. The lender also has
the option of paying for these obligations
by reducing your advances to cover the
expense. Make sure you read the loan
documents carefully to make sure you
understand all the conditions that can cause
your loan to become due.
This article is the property of
www.1st-in-homeloans.com, which has been
offering home mortgage services since 2002. To
find out more visit
www.1st-in-homeloans.com
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