Reverse Mortgages and Home Equity Growth - The Facts
Reverse mortgages allow the borrower to take out a loan without having to pay back the lender on a monthly plan. However, its not without its shortcomings, and equity can get eaten up.
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.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. Ill cover the two main forces.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
In most cases normal real estate appreciation adds to the homes equity, even with the accrual of interest against the home from the reverse mortgage.
Most people qualify for a certain amount of money based upon the value of the home. Most dont take all of this money. Most let a good deal sit in a line of credit where it isnt accruing interest against the homes 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.
Right away, there is interest gathering on one hundred and thirty thousand dollars. Do the numbers and you will see that amassing interest will quickly take away from any equity in the home.
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.
Continuing the example above, lets say the borrower only used one hundred thousand dollars right away. Twenty years from now, there would still be equity of over $100,000.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be.
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.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. Ill cover the two main forces.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
In most cases normal real estate appreciation adds to the homes equity, even with the accrual of interest against the home from the reverse mortgage.
Most people qualify for a certain amount of money based upon the value of the home. Most dont take all of this money. Most let a good deal sit in a line of credit where it isnt accruing interest against the homes 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.
Right away, there is interest gathering on one hundred and thirty thousand dollars. Do the numbers and you will see that amassing interest will quickly take away from any equity in the home.
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.
Continuing the example above, lets say the borrower only used one hundred thousand dollars right away. Twenty years from now, there would still be equity of over $100,000.
When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be.
About the Author:
Contemplating the reverse mortgage or a California reverse mortgage (aka HECM)Get educated by clicking that link or this one leading to another great info site for the California reverse mortgage.
posted by Credit Counseling at
5:19 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home