Do Reverse Mortgages & Equity Growth Go Hand in Hand?
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.
The lender must have a financial gain somewhere along the line. This is done at the end of the loan, with the interest accruing on the principal amount loaned to the borrower. At this time the lender can get back the investment and make a profit.
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.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
Usually, normal appreciation will add to equity in a home, even with the reverse mortgage interest accumulating against it.
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.
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.
In the same example, lets say the borrower only used $100,000 immediately. In twenty years there would still be over $100,000 in equity. In the latter example the borrower actually had a net gain.
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.
The lender must have a financial gain somewhere along the line. This is done at the end of the loan, with the interest accruing on the principal amount loaned to the borrower. At this time the lender can get back the investment and make a profit.
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.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
Usually, normal appreciation will add to equity in a home, even with the reverse mortgage interest accumulating against it.
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.
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.
In the same example, lets say the borrower only used $100,000 immediately. In twenty years there would still be over $100,000 in equity. In the latter example the borrower actually had a net gain.
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 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.
posted by Credit Counseling at
5:02 AM
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