Reverse Mortgage

Reverse mortgage is a new kind of loan against your home that you need not pay back as long as you live in that house. With reverse mortgage you can mortgage the value of your home in cash without repaying the loan every month and as well as without moving out of the house, and this cash can be repaid in several ways like you can pay at one stretch in single lump sum of amount, or in regular cash advance monthly, or in credit line account that is you can decide how much available cash can be paid or combinations of any of these methods.

For senior citizens above 62 years, lenders offer instant cash without any monthly payments. This allows the pensioners with a home, but no cash, to get easy financing to meet their daily needs or for any other purposes. This allows them to convert their equity tied up in their home into cash.

For other kind of loans the lender check your income documents for the verification of your repayment status monthly, but in reverse mortgage there is no need of repayment of loan monthly, so you need not require any income proof, even if you have no source of income but still you are eligible of reverse mortgage.

What are the advantages and risks of this type of mortgage?

1. Reside in your own home
This mortgage allows you to reside in your own home. You get monthly income which will help you maintain a comfortable standard of living.

2. Tax
The money generated is non-taxable since it is a loan and not income. In the short term, the advantages seem to be very attractive but in the long term the risks far outweigh the benefits. Unlike a conventional mortgage, in reverse mortgages the lender pays you money based on the equity in the home. But in return the lender imposes strict conditions on you. You get the mortgage only on the primary residence. So if there is another home where you do not reside, you will not get the mortgage. If you die, sell home or change your main residence, you need to pay back the loan along with the accrued interest. To do that, you will have to sell off the home. Also, this mortgage can erode the accumulated equity in the house rapidly. Besides, if you want to leave the house as an inheritance, you will not be able to do so.

3. Loss
With other kind of mortgages you may lose your home in case you do not make your repayment monthly. In reverse mortgage, you may not lose your home by not making the repayment, mostly reverse mortgages does not require any repayment as long as you live and that is the reason reverse mortgage differs from other loans

With reverse mortgage your debt gets increased and the equity of your home decreases, as the lender lends you the cash and you don't make the repayment, and the debt amount get increased as the interest is being added up with your balance loan amount and ultimately your debts increase and your equity decreases, unless the value of your home is getting increased. Incase if the value of your home decreased there will not be any equity left out except your loan amount so it is nothing but spending down your home equity while you live in your home with out the need of making repayments.

Exception in reverse mortgages are when you get the loan advance without interest charged on it your debt would remain the same and your equity would grow with the increase in home value. But normally home value does not grow at high rates and also the interest rate is also charged so finally the majority of the reverse mortgages ended up with “falling equity and rising debt” loans.