Reverse Mortgage
A reverse mortgage can allow you to access your property’s equity.
The risk is if your asset has not increased in value, or has even reduced in value whilst you increased your loan balance.
Buying a home is such a wonderful thing, it is yours, you can do what you want with the inside and potentially the outside, you don’t need to move and it will increase in value. Except for what you can do inside the property all of these things can be argued against. You do not own the home if you owe money, you may need to move if you cannot afford the repayments or if the dwelling does not meet your needs and thousands of properties are bought and sold every year operating as the housing market, markets fluctuate.
Saying you own a mortgage doesn’t sound as good as saying you own a home, particularly due to the legal right of the lender to take possession of the asset in certain circumatances. In this case a reverse mortgage sounds polite, and it can be. You are provided with funds, secured against the value of your home, with interest costs, such as refinancing, although the amount you owe increases over time rather than decreasing. This is beneficial if you do not have sufficient funds for your living expenses, but you have a large amount of equity (asset value) in your home that you otherwise wouldn’t be able to use without selling. There are specific criteria required to enter into a reverse mortgage, so before you start spending that cash please check the criteria with your financial institution and of course you must be at least 60 years of age.
Although the amount you owe increases over time the calculations required to determine the future value can be done the same way as, lets call them forward loans. You live in a property valued at $600,000 and you owe $100,000, lucky you with your $500,000 equity, but you feel like you are struggling to get by each week, enter the reverse mortgage.
You determine that you will require $100,000 for 10 years and you will be charged 5% interest per annum;
In Excel type in a cell =FV( Input the rate 0.05, input the # of payments 10, input zero as we are not making payments 0, input amount borrowing 100,000). This will result in the figure -$162,889.46
In this example the $100,000 you removed from your home equity has resulted in you paying $62,889.46 over 10 years (excluding any potential fees) resulting in a total owing figure of $262,889.46 as we are including the $100,000 we already owed before this contract. Ideally your home has increased in value to maybe $800,000 leaving you with more equity in your home than before and you didn’t need to pay stamp duty on another property or move all of your things.
Financial institutions will be prevented from allowing the amount you owe on your property increasing above a certain percentage of the asset value, but the risk is if your asset has not increased in value, or has even reduced in value.
