Reverse Mortgage Definition, Info and Pros vs Cons - LOYFLY

Reverse Mortgage Definition, Info and Pros vs Cons. Reverse Mortgage is a type of loan that you can get against the value of your house. It is quite a typical loan, in which the loan does not need to be repaid until the person dies, or the person moves out selling the house. Going by this definition of reverse mortgage, it is available only for senior citizens above a particular age who intend to stay in their present home for a considerable length of time. This loan is often presented to senior citizens in the form of money they can borrow for enjoying their retirement life or going on vacations that they have always longed to. Reverse mortgage lenders are ready to lend huge lump-sum money which can affect the mindset of people. However, there are some cons to this kind of loan.

How does Reverse Mortgage loan work ? Well, to understand its mechanism, we need to study it from the lender’s point of view. Reverse Mortgage is designed in such a way, that the Principal loaned and the Interest accrued over the number of years the person may live will definitely not exceed the net present value of the house. You can understand it from this example. Suppose your house is worth $ 1 million. This is the market price of house at present. From this value, the lender subtracts the outstanding balance of mortgage etc . The remaining sum is the Home Equity. Now, they set up interest rates and using compound interest formula, come up with Principals for each interest rate and number of years. The interest accrues on this principal but the total sum of principal plus interest will never exceed the Home Equity throughout your life period. This saves the lender from virtually giving free money to home owners. They keep their side safe.

There is only one Pro of a reverse mortgage loan. It is just a scheme that you can avail to get lump sum money for some need. In case of reverse mortgage credit score or credit history is generally not checked. You can use this to get money based on the fact that you own property. Those who are old enough and will spend the rest of their life in that house can get a much higher principal amount, with which they can enjoy vacations or so even if they do not have sufficient savings. However, there are many cons to a reverse mortgage.

Be clear about these cons to Reverse Mortgage plans :

  • A Reverse Mortgage jeopardizes your home. If the loan amount is not paid according to terms and conditions , the house is foreclosed by the lender. Your coming generation can be faced with excessive financial pressure of either letting go of the house or paying off a gigantic loan amount.
  • Reverse Mortgage may seem a lot of money but it generally does not pay you well enough. You can get a good amount only if the mortgage rates are low. In high interest rate condition, principal is generally reduced.
  • There has been observed a trend of variable pricing by reverse mortgage lenders to lure senior citizens. Some reverse mortgage scams too have been reported.

It is important that as a Senior Citizen, you get some financial education and completely understand the Terms and Conditions of a Reverse Mortgage loan. You should know what you are getting into. There are some myths about reverse mortgage loans which are absolutely not true.

  • A Reverse Mortgage loan is never free money. A loan is a loan and it has to be repaid.
  • A Reverse Mortgage can lead to foreclosure. So, you may actually lose your valuable house if you do not comprehend the T&C properly.

Reverse Mortgage companies have models that provide incentives to brokers for more sales. Therefore , these brokers may resort to techniques which cause people who are not well off to opt for this loan.

So, before taking a reverse mortgage you should perform the following things. Gauge your financial condition. If you own only one home or property, it may not be a good idea. Gather correct and specific information about reverse mortgage and the lenders. Also stay up to date with news to prevent yourself from scams. Also get information on other home equity loans and compare them to find a suitable one.

Be financially aware.

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