Reverse Mortgages Explained |
By Ken Charnely |
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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. |
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