Part 1: Introducing Reverse
Mortgages
Until recently, there were two main ways to get cash from
your home: you could sell your home, but then you
would have to move; or you could borrow against your
home, but then you would have to make monthly loan
repayments.
Now there is a third way of getting money from your home that
does not require you to leave it or to make regular loan
repayments.
“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 a 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, if you fail to make your monthly repayments, you
could lose your home. But with a reverse mortgage, you don’t have any
monthly repayments to make. So you can’t lose your home by failing to
make them.
Reverse mortgages typically require no repayment for as long as you — or
any co-owner(s) of yours — live in your 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 “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. During 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 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.
(To make certain you understand what “rising debt” and “falling equity”
mean, read the Appendix at the end of this booklet.)
Exceptions

Fri May 30 2008, 02:17

eire02 -

There is a lot of great information on line about reverse mortgages. One the safest spots to learn is on the AARP site. Here is the link http://www.aarp.org/money/revmort/

Reverse mortgages can be a way for families to use equity in their home to buy another home closer to family or for other needs. It is important to read up on the details but it is a way to use equity now without selling your home. Discuss it with a professional and your family.

CJ

Thu May 22 2008, 12:02

Hi there Eire02. What would you like to know about it

Kind Regards
Michael Barron
First Team Real Estate
(714) 552-6817
www.ntustinhomes4sale.com

Thu May 22 2008, 08:55