- as the population ages, this mortgage option is rapidly becoming more popular. In this article, we will examine some pros and cons of taking up these types of mortgage loans on your own home.
What is a Reverse Mortgage?
In a reverse mortgage, also known as a home equity loan, the home is used a collateral to get cash. This is similar to a standard mortgage, but with a reverse mortgage the homeowner doesn't need an income to qualify and there are no monthly loan payments.
With a reverse mortgage, the loan and the interest on the loan are paid off when the property is sold.
What are the Costs Involved?
The number one point to note is that interest rates are usually higher than average home loan rates.
As the interest compounds over the term of the loan, the debt can rise quickly, to the point where it may even be more than the value of your home. This is where it gets tricky.
You may have obligations that become quite onerous, especially as you get older – like maintaining the property to a standard required by the lender. If you don't meet these obligations, you may lose your no negative equity guarantee and the lender may be entitled to evict you.
If you die or move away, anyone who lives with you may not be able to stay in the home with you. Also the loan may affect your eligibility for a pension. There is no way to know for certain how much you will owe at the end of the loan.
You might not have enough money left over after the loan to pay for aged care accommodation or to leave an inheritance (although some products do allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt).
What's even worse, is that if you take up a reverse mortgage with a fixed term you may have to sell the house and repay the loan in your lifetime. Though its not all doom and gloom. There are certain advantages where you may want to take up reverse mortgages.
What are the Advantages?
Homeowners can pull needed cash from the equity of the home, without incurring monthly expenses. If you are cash strapped, unable to meet bills, or would like to see the world while you are still healthy, this might be a very viable option. Note that
lenders cannot force homeowners to sell the property to pay back the loan. Most reverse mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home. Retired people may want to consider the reverse mortgage as a way to generate cash flow. A reverse mortgage allows homeowners age 62 and over to remain in their homes while using their built-up equity for any purpose: to make repairs, keep up with property taxes or simply pay their bills.
Reverse mortgages guarantee that the homeowner can stay on the property for as long as he or she lives, even if the outstanding loan and interest grow to exceed the value property’s value.
What are the Disadvantages?
Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. A reverse mortgage can cost thousands more than a conventional mortgage. It’s important to calculate the cost of a reverse mortgage against what you would gain, because once you enter a reverse mortgage agreement, the mortgage company essentially owns your home.
Get sound advice. Discuss your reverse mortgage plans with legal and financial advisors, and family members, before making a decision. Because home ownership is often a person's most valuable asset, getting a reverse mortgage is essentially the same as spending the money you'd expect to leave to your heirs.
To reduce their risk, lenders generally limit reverse mortgage loans to amounts that are below their estimate of the property’s full value.
Age is an advantage when applying for a reverse mortgage. Borrowers must be at least age 62, and the older the homeowner is, the more money he or she would qualify for. For example, a 78-year-old borrower would qualify for a larger loan than a 62-year-old. Understand that reverse mortgages are rising-debt loans. This means that the interest is added to the principal loan balance each month, because it is not paid on a current basis. Therefore, the total amount of interest you owe increases significantly with time as the interest compounds. Reverse mortgages also use up some or all of the equity in your home.
A recent Choice consumer survey found that some mortgage brokers provided a poor level of information; often recommended people borrow larger amounts than they needed and the contracts can contain very heavy penalty clauses.
Reforms in the finance brokers legislation specific to reverse mortgages include.
1. Disclosure of the time when the amount to be repaid would be greater than the consumer’s equity in the home;
2. Should a consumer be anticipating future expenses, such as retirement village accommodation, the broker would estimate the time at which the equity in the home would be insufficient to meet those expenses;
3. The effect of the product on pensions and taxes as well as the possible term of the contract, given the client's age and life expectancy; and
4. The client's plans for their estate must been taken into consideration.
To sum up, if you are looking into getting a home equity loan, make sure that you do your homework. Consult with the rest of your family before making any decisions and try to get the best possible rats and terms before you commit. Here are some contact details of mortgage brokers that will help you make some important decisions:
The Mortgage Bureau
PH 02 9629 1888
ANZ Home Loans
PH 1800 035 500
PH 13 14 62
Virgin Home Loans
PH 1300 852 123
PH 13 13 00
Revive Home Loans
1300 659 589
Aussie Home Loans
PH 13 13 33
PH 13 24 84
PH 1300 782 066
Howard Pacific Finance
PH 02 9283 4944
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This article is based on information that the author has gathered from personal experience and research, and such information is not to be solely relied upon by third parties to substitute any other professional advice.