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.
At the end of the mortgage is when the lender recoups the investment and makes a profit. Interest simply compounds on to the principal loaned to the borrower.
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 will definitely deduct from the equity in the home. On the other hand the natural progression of home values grows the borrowers equity.
Appreciation usually adds to the homes equity, even with interest accruing against it from the reverse mortgage.
Based upon the value of the home, a borrower will qualify for a specific amount of money, and most will not take all of this money. Instead, they will let a fair amount stay in a line of credit. This credit line doesnt accrue interest against the equity in the home.
For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.
Basic math tells us interest will accrue and eat into the borrowers equity as fast as it can in this scenario. From the get-go, interest is accruing on $130,000.
If interest accrues at 6.11% (this is close to where it is currently), and the home value grows at 4% (national average), it will take over twenty years for the loan to build up enough interest to eat away the entirety 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.
At the end of the mortgage is when the lender recoups the investment and makes a profit. Interest simply compounds on to the principal loaned to the borrower.
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 will definitely deduct from the equity in the home. On the other hand the natural progression of home values grows the borrowers equity.
Appreciation usually adds to the homes equity, even with interest accruing against it from the reverse mortgage.
Based upon the value of the home, a borrower will qualify for a specific amount of money, and most will not take all of this money. Instead, they will let a fair amount stay in a line of credit. This credit line doesnt accrue interest against the equity in the home.
For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.
Basic math tells us interest will accrue and eat into the borrowers equity as fast as it can in this scenario. From the get-go, interest is accruing on $130,000.
If interest accrues at 6.11% (this is close to where it is currently), and the home value grows at 4% (national average), it will take over twenty years for the loan to build up enough interest to eat away the entirety 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.
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