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Let’s explore repayment of a conventional
mortgage and compare this to how a reverse
home mortgage is repaid. Conventional mortgage payments
are made on a monthly basis. Depending on the loan
type, these payments could be interest only, or a
combination of principal and interest. These payments
are amortized over a 30-year period and, in most cases,
never paid off. The loan balance, depending on the
loan type, will either stay the same, go down over
time, or increase. When both borrowers pass away,
with a conventional mortgage the beneficiaries sell
the house and payoff the mortgage. The beneficiaries
keep the remaining equity in the home.
With a reverse home mortgage, no
payments are made during the life of the borrower(s).
Since no payments are made during the term of the
reverse home mortgage loan, the loan balance rises
over time. In most areas where appreciation is good,
the value of the home grows at a much faster rate
than the loan balance. Therefore the remaining equity
continues to grow (see example below). When the last
borrower passes, or it is decided to sell the home
and move, the loan becomes due. The ownership of the
home is then passed to the estate or directed by a
living will or will to the beneficiaries. The beneficiaries
now own the home and have six months (plus two three
months extensions, if needed) to sell or refinance
the home. Once the home is sold, the Reverse home
mortgage lender is paid off and the beneficiaries
keep the remaining equity in the home.
Actual Example:
In April 2006, in Emeryville, California, a single,
78 year-old man applied and was approved for a reverse
home mortgage. The home was appraised at $550,000
and the beginning loan balance after close of escrow
was $244,192. Equity at the start of the loan is was
$305,808. After 5 years, based on a calculated 8%
appreciation, the home will be worth $808,130 and
the loan balance will be $346,275 (assuming 6.27%
interest rate). So the remaining equity after 5 years
would be $461,856.
This example shows that with a reverse home mortgage
a senior is able to receive the debt relief or monthly
payments he or she needs while the beneficiaries are
secure in knowing the home equity is growing. It is
a win-win situation for all involved. |
