How Does a Reverse Mortgage Work
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In this article: Reverse mortgages explained plus the dangers and pitfalls.
A Reverse Mortgage is leveraged against the deed to the property, not unlike a normal mortgage. The differences between a reverse mortgage and a regular mortgagee are:
The most outstanding difference is no doubt the lack of the typical mortgage payments. With reverse home loans you don’t pay monthly interest payments as it is indented to help with cash flow of the house hold. Every month the interest accumulates and is put towards the amount of the loan.
What are reversible mortgages? The qualification process for a reverse mortgage is also different, in that it is not based on your income or credit rating. In North America you are eligible for a reverse mortgage if you are 60 years of age or older and own you’re property/home making this the easiest mortgage to qualify for and great for those on a fixed income. You must live in the home that you have taken a reverse mortgage on as your primary residence, and so long as you live there you make no payments towards the loan.
There a certain amount of security build in to reverse mortgages the amount of the loan cannot exceed the appraised value of the property. One of the main concerns most have in regards to taking a loan of this nature is: Can the accumulated interest owed surpass the value/ equity of the home. This is extremely unlikely for the following reasons:
There is a built in guarantee that stipulates that the home owner will only have to pay what the property is worth at the time of sale.
As the chart illustrates below, over time the average property will appreciate. Since the equity is much more likely to go up over the years and the mortgage loan amount is typically only up to 40-50%.
|
Year |
Home Value |
Loan Amount |
|
1 |
$300,000.00 |
$120,000.00 |
|
2 |
$315,000.00 |
$128,400.00 |
|
3 |
$330,750.00 |
$137,388.00 |
|
4 |
$347,287.50 |
$147,005.16 |
|
5 |
$364,651.88 |
$157,295.52 |
|
6 |
$382,884.47 |
$168,306.21 |
|
7 |
$402,028.69 |
$180,087.64 |
|
8 |
$422,130.13 |
$192,693.78 |
|
9 |
$443,236.63 |
$206,182.34 |
|
10 |
$465,398.46 |
$220,615.11 |
* There is often confusion when it comes to reverse mortgages and refinancing. For more on mortgage refinancing and rates, please see the link. For current WV home loan rates go here.
How Does a Reverse Mortgage Work?
How does a reverse mortgage work and when it is a good idea to use one? This is a common question for homeowners over a certain age lately, and the reasons are obvious. Reverse mortgages.
Reverse Mortgage Benefits and Pitfalls
Q: What is your opinion of reverse mortgages? We have a home assessed at $157000. Our nest egg is being eaten away and I was wondering about the benefits and pitfalls of a reverse mortgages.
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