Understanding Reverse Mortgages

Understanding Reverse Mortgages
Can't remember how many times I've been asked What is​ a​ reverse mortgage? Reverse mortgages are a​ great way to​ get a​ loan using your primary asset .​
As in​ all cases of​ financial lending,​ the​ flexibility comes at​ a​ price .​
a​ reverse mortgage is​ a​ loan using your house and is​ referred to​ as​ a​ rising debt,​ falling equity kind of​ deal .​
To compare reverse mortgage to​ a​ more traditional one,​ the​ type of​ mortgage commonly used when buying a​ house can be classed as​ a​ forward mortgage .​
To qualify for forward mortgage,​ you​ must have a​ steady source of​ income .​
Because the​ mortgage is​ secured by the​ asset,​ if​ you​ default on​ the​ payments,​ your house can be taken from you​ .​
As you​ pay off the​ house,​ your equity is​ the​ difference between the​ mortgage amount and how much you've paid .​
When the​ last mortgage payment is​ made,​ the​ house belongs to​ you​ .​
On the​ other hand a​ reverse mortgage process doesn't require that the​ applicant have great credit,​ or​ even that they have a​ steady source of​ income .​
The major stipulation is​ that the​ house is​ owned by the​ applicant .​
Generally,​ there is​ also a​ minimum age required as​ well,​ the​ older the​ applicant,​ the​ higher the​ loan amount can be .​
As well,​ reverse mortgages must be the​ only debt against your house .​
Differing from a​ conventional forward mortgage,​ your debt increases along with your equity .​
Instead of​ making any monthly payments,​ the​ amount loaned has interest added to​ it​ - which eats away at​ your equity .​
If the​ loan is​ over a​ long period of​ time,​ when the​ mortgage comes due,​ there may be a​ large amount owed .​
Furthermore,​ if​ the​ price of​ your home decreased,​ there may not be any equity left over .​
On the​ flip side,​ if​ it​ was to​ increase,​ this could allow for an​ equity gain,​ but this isn't typical of​ the​ marketplace .​
When deciding how to​ draw money from the​ reverse mortgage,​ there are a​ few options; a​ single lump sum,​ regular monthly advances,​ or​ a​ credit account .​
There are conditions in​ this kind of​ mortgage that would warrant the​ immediate repayment of​ the​ loan; the​ mortgage will be due when the​ borrower dies,​ sells the​ house,​ or​ moves out .​
Failure to​ pay your property taxes or​ insurance on​ the​ home will undoubtedly lead to​ a​ default as​ well .​
The lender also has the​ option of​ paying for these obligations by reducing your advances to​ cover the​ expense .​
Make sure you​ read the​ loan documents carefully to​ make sure you​ understand all the​ conditions that can cause your loan to​ become due.

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