If you’re senior person looking to cash in your home equity and use it to your advantage, a reverse mortgage can help. With a reverse mortgage, you can convert your home equity into a steady flow of tax-free income thereby receiving a monthly paycheck at regular intervals. As such these loans are preferable choices of seniors in the US as well as in UK, Canada and even in India.
This article will help you get an idea of reverse mortgages especially the aspects given below.
What is a reverse mortgage?
Do I qualify for the loan?
How much of cash is available?
How do I get the cash?
Are there any drawbacks?
What is a reverse mortgage?
Reverse mortgage is a home loan which provides you with cash if you’re planning for retirement or have already retired. Such a loan does not require to be paid back until the loan period is over and you can continue to own your home even during the life of the loan.
Do I qualify for the loan?
Unlike other loan options, there isn’t any income or credit requirement to qualify for a reverse mortgage except that there shouldn’t be any debt on your home. And, even if there is, it should be paid off by the cash proceeds of the reverse loan.
To be eligible for the loan, one has to be 62 years or above. Know moreĀ
How much of cash is available?
The amount you receive through a reverse mortgage will depend on:
How old is the youngest borrower?
The appraised value of your home
The equity built up in your home
What loan program you choose
Current mortgage rates
How do I get the cash?
You can receive funds from a reverse mortgage in different ways.
The lender or the company can provide you with a single payment.
You may ask for monthly cash advances.
You can apply for a credit-line account which gives you the opportunity to withdraw a required amount of cash whenever you are in need.
The lender may allow for a combination of monthly cash advances as well as andquot;credit-line accountandquot;.
Are there any drawbacks?
A reverse mortgage is just the opposite of a traditional mortgage which requires the payment of the principal loan amount along with interest on a monthly basis. This helps you to build up home equity thereby raising your home value. But with reverse mortgages, there are no such monthly payments. Hence, the total debt starts going up. The home equity therefore reduces to an extremely low value unless the home value goes up at a higher rate. Therefore reverse mortgages are often known as andquot;rising debt and falling equityandquot;.
An example on andquot;Rising debt and falling equityandquot;.
Monthly Loan Amount : $2,000 Yearly Loan Advance : $24,000Yearly Interest Rate : 8%Original Home Value : $250,000Appreciation Rate of Home Value : 5% per annum End of Year Principal Amount ($) Total Interest ($)Loan Amount ($) Total Home Value ($) Home Equity ($)(Total Home Value – Loan Amount) 124,0001,05225,052 262,500237,448248,0004,102 52,102275,625223,5233 72,0009,22481,224289,406208,182 496,00016,495112,495303,876 191,3815120,00025,990 145,990319,070173,080
The above calculation shows, even if your home value goes up, it may not be enough to raise your home equity. The rate of appreciation in home value should be high enough such that even if your loan balance increases, your home equity won’t go down easily.
Inspite of its drawback, reverse mortgages are preferable options when it comes to paying for your healthcare costs, remodeling your home, making a big purchase and changing your lifestyle. Moreover, if you have debts to pay off, need money for someone’s education or make plans to go on a vacation, reverse mortgages are worth considering.
Related Articles:Comparative analysis of Reverse Mortgage and others.Eligibility of Reverse MortgageReverse Mortgage – When to pay back?Is Reverse Mortgage safe?Types of Reverse Mortgage ProductsTaxes for Elderly Mortgage ApplicantsRelated References:Mortgage For SeniorsKnow More About Reverse Mortgage