Thursday, June 16, 2011

Guest Post: Release Your Equity With a Reverse Mortgage

A reverse mortgage is a mortgage loan taken out with your own property used as security and the amount loaned not having to be repaid until your death or if the house is to be sold before that time. The mortgage provider will hand the money over at the beginning of the loan which will attract compound interest from that day on although no repayments will be required while you remain alive or if you wish to dispose of the property beforehand. If there is any money left over following the event of your death and the property being sold, the excess amount will be distributed among your beneficiaries. If on the other hand you decide to sell the home you will need to satisfy the mortgage debt in the usual way before any remaining monies can be distributed.

The three main characteristics that make a reverse mortgage different from other types of mortgages are:

  • There are no mandatory payments required until what is known as certain 'trigger' events take place. These trigger events include your death or that of your spouse or partner if their life outlasts your own, the earlier sale of the property, your leaving the property or a breach of the contract occurs.
  • There is no fixed term as there is in a normal home loan as a reverse mortgage lasts until the death of the surviving owner or one of the other 'trigger' events occur.
  • Interest is charged and compounded over the life of the loan.
Eligible applicants will be allowed to borrow up to a limited amount against the security of the property as long as it is your primary residence, although there are circumstances when a reverse mortgage can be arranged with a non-owner occupied property being accepted as security. The beauty of such a loan is that you will never be in default due to not making any repayments other than breaking one or more of the conditions that will be imposed such as not maintaining the property in a satisfactory manner. If the property does fall into disrepair the lender will have the right to carry out the maintenance that is required and have the cost charged to the balance of the loan. Factors Determining Eligibility for a Reverse Mortgage A reverse mortgage loan applicant must be able to satisfy the following requirements:
  • Be at least 60 years old, in most cases, and where there is more than the one borrower the youngest determines the age eligibility.
  • The amount that will be loaned will depend on the lender's own policy. This is usually calculated by taking into account the applicants age, as the older the applicant the larger the amount available to be borrowed.
  • Another factor will be the value of the property itself as the more valuable the larger the size of the loan also. The loan to value ratio (LVR) will refer to the amount advanced against the value of the property, the maximum LVR is commonly around 50 percent or lower.
  • The minimum amount can be as low as $10,000 or any other specified amount.
  • If there is an existing mortgage held over the property it must first be repaid in full as the reverse mortgage provider has to own the only mortgage being secured by the property.
  • The property will need to be valued on a periodic basis with the cost either borne by yourself or added to the loan amount.
  • The location of the property may also be a factor.
The interest rate charged for a reverse mortgage is usually a little more than the accepted standard rate at the time. It is normally accrued daily and allocated to the home loan account on a monthly basis, in other words it is compounded, meaning the debt increases considerably the longer it runs. For instance if you were to borrow an amount of $30,000 at an interest rate of 8.5 percent and a monthly account keeping fee of $10, in 10 years times the debt will have grown to $71,860. This also assumes the interest rate remains constant over that time. Other costs are also incurred such as the application fee and if these are added to the amount being borrowed they too will be subjected to compound interest. If you wish you can arrange the loan to be paid to you in the manner of a regular income. You can have this done through a line of credit being established or receive small regular draw downs. You will not be charged any interest on the portion of the loan you haven't used. Of course if you wish to take a lump sum payment you can but the interest will begin on whatever amount you draw down on. A reverse mortgage can be a quite useful way of turning your equity into cash at the time you need it the most. After you have retired and no longer earning an income, especially if you haven't any savings or superannuation to fall back on.

This article was written by John from Home Loan Finder.

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