What is a reverse mortgage?
Please select from below for applicable statutes and explanations:
* This is by no means intended to be a complete description
of reverse mortgages. This page is intended to give a
litigant an idea of the reverse mortgage process.
Do not rely on this page alone for guidance; contact
Edward Stone for additional information.
Please contact Edward Stone here.
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A reverse mortgage is a type of home loan
that lets a homeowner convert a portion of the
equity in his or her home into cash. The concept is
similar to a home equity loan or cash out second
mortgage. But, unlike a traditional home equity loan
or second mortgage, no repayment is required until
the borrower(s) no longer use the home as their
principal residence.
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With a second mortgage, or a home
equity line of credit, you must meet various
requirements, including minimum income and
qualifying debt to income ratios. The reverse
mortgage is different in that it pays you, and if
you meet age and equity requirements, is available regardless of your
current income. The amount you can borrow depends on
your age, the current interest rate, and the
appraised value of your home or FHA's mortgage
limits for your area, whichever is less. Generally,
the more valuable your home is, the older you are,
the lower the interest, the more you can borrow. You
don't make payments, because the loan is not due as
long as the house is your principal residence. You
still are required to pay your real estate taxes and
other conventional payments like utilities.
You can see how a reverse mortgage works by
comparing it to a "forward" mortgage — the kind you
use to buy a home. Both types of mortgages create
debt against your home. And both affect how much
equity or ownership value you have in your home. But
they do so in opposite ways. Read on.
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Reverse mortgages have a different purpose than
forward mortgages do. With a forward mortgage, you
use your income to repay debt, and this builds up
equity in your home. But with a reverse mortgage,
you are taking the equity out in cash. So with a
reverse mortgage your debt increases; and your home equity decreases.
It's just the opposite, or reverse, of a forward
mortgage. With a reverse mortgage, the lender sends
you cash, and you make no repayments. So the amount
you owe (your debt) gets larger as you get more and
more cash and more interest is added to your loan
balance. As your debt grows, your equity shrinks,
unless your home's value is growing at a high rate.
When a reverse mortgage becomes due and payable,
you may owe a lot of money and your equity may be
very small. If you have the loan for a long time, or
if your home's value decreases, there may not be any
equity left at the end of the loan.
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Lets try an example... assume that you receive
$1,000 a month (Column A) which accrues monthly interest at 0.5% in
(Column B) to equal
the loan balance (Column C). Over
time, the loan balance grows larger. The loan balance is subtracted from the
home's value. We are assuming that the value
of the home appreciates 4% per year.
Assumptions:
Monthly Loan Advance.........$1,000
Monthly Interest Rate...….....0.5% (6% per year)
Original Home Value......…...$200,000
Appreciation Rate.........…….4% per year
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A |
B |
C |
D |
(D - C) |
| End of Year |
Principal Advances |
Interest @ 0.5%/mo. |
Loan Balance |
Home Value |
Home Equity |
| 1 |
$12,000 |
$397 |
$12,397 |
$208,000 |
$195,602 |
| 2 |
24,000 |
1,559 |
25,559 |
216,320 |
190,760 |
| 3 |
36,000 |
3,532 |
39,532 |
224,872 |
185,339 |
| 4 |
48,000 |
6,368 |
54,368 |
233,971 |
179,602 |
| 5 |
60,000 |
10,118 |
70,118 |
243,330 |
173,211 |
| 6 |
72,000 |
14,840 |
86,840 |
253,063 |
166,222 |
| 7 |
84,000 |
20,594 |
104,594 |
263,186 |
158,591 |
| 8 |
96,000 |
27,442 |
123,442 |
273,713 |
150,270 |
| 9 |
108,000 |
35,453 |
143,453 |
284,662 |
141,208 |
| 10 |
120,000 |
44,698 |
164,698 |
296,048 |
131,349 |
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After closing a reverse mortgage, you have three
days to reconsider your decision. If for any reason
you decide you do not want the loan, you can cancel
it.
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