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Thursday, January 1, 2009

Home Equity and the Reverse Mortgage

By Mortrev Vanrock

Reverse mortgages allow the borrower to take out a loan without having to pay back the lender on a monthly plan. However, its not without its shortcomings, and equity can get eaten up.

Naturally, the lender has to make money somewhere, so they do it at the end of the loan. Interest simply accrues on the principal loaned to the borrower. At the end of the mortgage, the lender recoups the investment and makes its profit.

A fear the borrower may have is the interest amounting to so much that it consumes all of the equity in the home. This is something to be conscious in your investigations.

Remember though, several energies are working here. Some devour equity and other, more homeowner-friendly energies give to it.

Accruing interest will definitely deduct from the equity in the home. On the other hand the natural progression of home values grows the borrowers equity.

In most cases normal real estate appreciation adds to the homes equity, even with the accrual of interest against the home from the reverse mortgage.

Based upon the value of the home, a borrower will qualify for a specific amount of money, and most will not take all of this money. Instead, they will let a fair amount stay in a line of credit. This credit line doesnt accrue interest against the equity in the home.

As an example, we will have the borrower decide to use all of the money right away. His house is worth $200,000, and the borrower qualifies for $130,000.

Basic math tells us interest will accrue and eat into the borrowers equity as fast as it can in this scenario. From the get-go, interest is accruing on $130,000.

If interest accrues at 6.11% (this is close to where it is currently), and the home value grows at 4% (national average), it will take over twenty years for the loan to build up enough interest to eat away the entirety of the homes equity.

In the same example, lets say the borrower only used $100,000 immediately. In twenty years there would still be over $100,000 in equity. In the latter example the borrower actually had a net gain.

When looking at the downside of the reverse mortgage, it is prudent to consider how valuable and beneficial appreciation can be.

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