Reverse Mortgage Explained
Can't remember how many times I've been asked "What is a
reverse mortgage"? Reverse mortgages are a great way to get a
loan using your primary asset. As in all cases of financial
lending, the flexibility comes at a price. A reverse mortgage is
a loan using your house and is referred to as a "rising debt,
falling equity" kind of deal.
To compare reverse mortgage to a more traditional one, the type
of mortgage commonly used when buying a house can be classed as
a "forward mortgage". To qualify for forward mortgage, you must
have a steady source of income. Because the mortgage is secured
by the asset, if you default on the payments, your house can be
taken from you. As you pay off the house, your equity is the
difference between the mortgage amount and how much you've paid.
When the last mortgage payment is made, the house belongs to you.
On the other hand a reverse mortgage process doesn't require
that the applicant have great credit, or even that they have a
steady source of income. The major stipulation is that the house
is owned by the applicant. Generally, there is also a minimum
age required as well, the older the applicant, the higher the
loan amount can be. As well, reverse mortgages must be the only
debt against your house.
Differing from a conventional "forward mortgage", your debt
increases along with your equity. Instead of making any monthly
payments, the amount loaned has interest added to it - which
eats away at your equity. If the loan is over a long period of
time, when the mortgage comes due, there may be a large amount
owed. Furthermore, if the price of your home decreased, there
may not be any equity left over. On the flip side, if it was to
increase, this could allow for an equity gain, but this isn't
typical of the marketplace.
When deciding how to draw money from the reverse mortgage, there
are a few options; a single lump sum, regular monthly advances,
or a credit account. There are conditions in this kind of
mortgage that would warrant the immediate repayment of the loan;
the mortgage will be due when the borrower dies, sells the
house, or moves out.
Failure to pay your property taxes or insurance on the home will
undoubtedly lead to a default as well. The lender also has the
option of paying for these obligations by reducing your advances
to cover the expense. Make sure you read the loan documents
carefully to make sure you understand all the conditions that
can cause your loan to become due.
Hope this helps clear up the term reverse mortgages.
Ken Chukwell
http://www.online-loans-pro.com/
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About Author
Ken Chukwell is a personal finance enthusiast whose website
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