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.
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.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
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.
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.
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.
Most people dont take into consideration how powerful home appreciation can be, especially when looking at 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.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
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.
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.
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.
Most people dont take into consideration how powerful home appreciation can be, especially when looking at the negative side of the reverse mortgage.
About the Author:
Thinking about a HECM or studying the California reverse mortgage goGet educated by clicking that link or this one leading to an excellent informational source for the California reverse mortgage.
posted by Debt Consolidation Loan at
5:37 AM
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