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Reverse Mortgages
A
"reverse" mortgage is a loan
against your home that you do not have to
pay back for as long as you live there. With
a reverse mortgage, you can turn the value
of your home into cash without having to
move or to repay the loan each month. The
cash you get from a reverse mortgage can be
paid to you in several ways:
- all at
once, in a single lump sum of cash;
- as a
regular monthly cash advance;
- as a
"creditline" account that lets
you decide when and how much of your
available cash is paid to you; or
- as a
combination of these payment methods.
No matter
how this loan is paid out to you, you
typically don't have to pay anything back
until you die, sell your home, or
permanently move out of your home. To be
eligible for most reverse mortgages, you
must own your home and be 62 years of age or
older.
Other
Home Loans
To qualify
for most loans, the lender checks your
income to see how much you can afford to pay
back each month. But with a reverse
mortgage, you don't have to make monthly
repayments. So you don't need a minimum
amount of income to qualify for a reverse
mortgage. You could have no income and still
be able to get a reverse mortgage.
With most
home loans, you could lose your home if you
don't make your monthly payments. But with a
reverse mortgage, there aren't any monthly
repayments to make. So you can't lose your
home by not making them. Most reverse
mortgages require no repayment for as long
as you — or any co-owner(s) — live in
the home. So they differ from other home
loans in these important ways:
- you
don't need an income to qualify for a
reverse mortgage; and
- you
don't have to make monthly repayments on
a reverse mortgage.
"Forward"
Mortgages
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.
"Debt"
is the amount of money you owe a lender. It
includes cash advances made to you or for
your benefit, plus interest. "Home
equity" means the value of your home
(what it would sell for) minus any debt
against it. For example, if your home is
worth $150,000 and you still owe $30,000 on
your mortgage, your home equity is $120,000.
Falling
Debt, Rising Equity
When you
purchased your home, you probably made a
small down payment and borrowed the rest of
the money you needed to buy it. Then you
paid back your traditional
"forward" mortgage loan every
month over many years. During that time:
- your
debt decreased; and
- your
home equity increased.
As you
made each repayment, the amount you owed
(your debt or "loan balance") grew
smaller. But your ownership value (your
"equity") grew larger. If you
eventually made a final mortgage payment,
you then owed nothing, and your home equity
equaled the value of your home. In short,
your forward mortgage was a "falling
debt, rising equity" type of deal.
Rising
Debt, Falling Equity
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.
In short,
a reverse mortgage is a "rising debt,
falling equity" type of deal. But that
is exactly what informed reverse mortgage
borrowers want: to "spend down"
their home equity while they live in their
homes, without having to make monthly loan
repayments. There's more about this
important concept in an article called
"A 'Rising Debt' Loan" in the
Basics section of this site.
Exception
Reverse
mortgages don't always have rising debt and
falling equity. If a home's value grows
rapidly, your equity could increase over
time. Or, if you only get one loan advance
and no interest is charged on it, your debt
would never change. So your equity would
grow as your home's value increases. But
most home values don't grow at consistently
high rates, and interest is charged on most
mortgages. So the majority of reverse
mortgages end up being "rising debt,
falling equity" loans.
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