Home Equity and the Reverse Mortgage
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.
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.
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.
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.
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.
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.
Right away, there is interest gathering on one hundred and thirty thousand dollars. Do the numbers and you will see that amassing interest will quickly take away from any equity in the home.
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.
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.
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.
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.
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.
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.
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.
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.
Right away, there is interest gathering on one hundred and thirty thousand dollars. Do the numbers and you will see that amassing interest will quickly take away from any equity in the home.
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.
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.
About the Author:
Thinking about a HECM or a California reverse mortgage (aka HECM)Get educated by clicking that link or this one leading to a great site in California regarding the reverse mortgage.
posted by Debt Consolidation Loan at
5:41 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home