Reverse Mortgages Explained

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2110 - Reverse Mortgages Explained

Reverse Mortgages Explained

by: Robert Hutchinson

A 'Reverse Mortgage', also known as 'Equity Release', is a popular way to use your main asset (your home) to free up some cash for other purposes. In a standard loan, your income stream is used to 'qualify' for the loan. The bank will want to see that you have enough cash-flow from your job or other source of income in order to make the payments on the loan. By securing this forward loan on your house, the bank has extra security. After all, if you stop paying, they can take away your house. As the years go buy, you will build up 'equity', which is the difference between what your house is worth, and how much you owe on the loan, which will be reducing as you pay off principal.
A reverse loan, in contrast, requires no proof of income, no credit checks etc, you simply have to own the home you are borrowing against. The reason for this is that interest payments are 'rolled up' on the reverse loan - i.e they are added to the loan, and not repaid. Over time, of course, this starts to eat up your equity, because as each interest payment is added to the loan, interest starts being charged on the previous interest too!
Popular with older citizens, the reverse mortgage is often structured in such a way that the loan only becomes repayable on the death of the home-owner. Depending on the size of the loan and current market conditions, there may actually be no equity left when the loan is finally repaid, a matter only of interest to home-owners who prefer to leave something for their children. As with all loans, be careful not to default on ancillary charges, such as property tax, insurance, rates etc, as these could all lead to the loan being reclaimed early (foreclosed). Typically, the bank will have an option built in to the contract to increase your debt by paying these charges on your behalf, should you default, and this is not an option you want exercised, as you will then start paying interest on those charges too!
To sum up - reverse mortgages can be useful, but treat carefully - they can have a sting in the tail. Keep an eye on the outstanding balance every month, versus the value of your home for peace of mind.

About The Author

Robert Hutchinson writes for www.mortgagedown.com the site for free mortgage advice fast!

This article was posted on March 31, 2005

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