Reverse Mortgages Explained

A “regular” mortgage is usually thought of as a long-term debt that is used to pay for a piece of real property such as a house. The debtor will receive virtual ownership of the property while the loan on the property is paid off over a long period of time such as thirty years. The debt during that time is secured by the house. If the mortgage cannot be paid off, a foreclosure can take place. The hose will then be repossessed. If the house is paid off, the debtor will receive complete ownership of the property.

If the owner chooses to sell the house, he or she could make a profit since the house is likely to have accumulated in value since the point the debtor took out a mortgage on the property. This accumulated value is known as equity. For example, a home could be worth one hundred thousand dollars when it was bought. If it accumulated in value to one hundred and fifty thousand dollars, the home’s equity for the owner would be fifty thousand dollars.

How Reverse Mortgages Work

The idea behind a reverse mortgage is accessing this equity well before the debtor completely owns his or her house. By accessing this equity, the debtor can receive an extra source of income. In essence, the debtor is borrowing the equity from a financial institution. These equity payments could be used to pay for standard living expenses, to pay off other debts such as college tuition for children, or whatever else a debtor wishes.

The amount of credit a person can use by accessing their equity is usually calculated by taking the newly appraised value of the person’s home, subtracting the amount that has been paid on the mortgage, and than multiplying that amount by a certain percentage. Indeed, someone does not want to borrow the entire amount of equity in a home. At that point, the financial institution would own the home, and the debtor may be forced to move out.

The Dangers of a Reverse Mortgage

Due to dangers like this, many strict laws have been enacted in many countries to protect debtors who take out reverse mortgages. One example is that a debtor will probably not be allowed to access the entire equity of their home. Often, the law will place a limit on how much equity a debtor can access at a time. Often, a debtor will not be allowed to take out a reverse mortgage on a home for more than forty percent of its equity.

Secondly, there are usually age limits placed on how old someone must be to take out a reverse mortgage. This is to protect younger home buyers who are more likely to outlive their mortgages. In the United States, this age limit is set at sixty one. In Canada, it is sixty years old. In many European counties, the age limit is set at fifty.

In addition, there may be certain parts in the contract for the reverse mortgage that certain individuals may over look. One thing that is often included in these contracts is an agreement that a debtor will have access to their home as long as it is their primary residence. For senior citizens, this can present a significant risk. If a senior citizen moves to a facility such as a retirement due to needing supervised assistance, that senior citizen could lose their home. Similarly, if a person spends too much time at a vacation home, the bank could repossess the house as well.

Another problem can result for people who have adjustable rate reverse mortgages. If the interest rate increases, the amount of payment the debtor receives from the reverse mortgage will lower. This could be a serious problem if a person is depending on equity income from the reverse mortgage to get by.

Benefits

These are only a few of the dangers, but the benefit of having access to the equity of your home may out weigh any downsides to reverse mortgages. The advantage of taking out a reverse mortgage is the ability to have that extra income. This is especially beneficial for older individuals who want to retire.