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.
Naturally, the lender has to make money somewhere, so they do it at the end of the loan. Interest simply accrues on the principal loaned to the borrower. At the end of the mortgage, the lender recoups the investment and makes its profit.
The scary part for the borrower is the interest accruing so much that it eats away at all of the equity in the home. This is a fair thing to be concerned about.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
Usually, normal appreciation will add to equity in a home, even with the reverse mortgage interest accumulating against it.
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.
But lets assume the borrower uses all of it immediately. Lets say the house is worth $200,000 and they qualify for $130,000. And they take it all out right now.
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.
Naturally, the lender has to make money somewhere, so they do it at the end of the loan. Interest simply accrues on the principal loaned to the borrower. At the end of the mortgage, the lender recoups the investment and makes its profit.
The scary part for the borrower is the interest accruing so much that it eats away at all of the equity in the home. This is a fair thing to be concerned about.
Many things are going on in this process, and borrowers should take heed of this. Some factors consume equity while others grow equity.
Accruing interest against homes equity can be severe, however, home appreciation has tendency to slow this progression and even reverse it.
Usually, normal appreciation will add to equity in a home, even with the reverse mortgage interest accumulating against it.
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.
But lets assume the borrower uses all of it immediately. Lets say the house is worth $200,000 and they qualify for $130,000. And they take it all out right now.
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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Considering a reverse mortgage or a California reverse mortgage (aka HECM)Get educated by clicking that link or this one leading to a spectacular question and answer spot catering to the California reverse mortgage.
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