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How Does A Reverse Mortgage Work

May 3, 2008
With all of the commercials running on television lately, you've probably heard of companies extolling the benefits of a reverse mortgage. Usually geared towards seniors the reverse mortgage is portrayed as being the answer to your retirement dilemma as you will have no payments to make. Just enjoy your money. But what actually is a reverse mortgage and more importantly is it right for you?

A reverse mortgage can be broken into several different facets. You can break it into funds for monthly income, a line of credit, reserves, financing fees and insurance fees. To help you better understand how a reverse mortgage works, let's will go over during the course of the reverse mortgage, at closing, and in the future.

You will find that over time, you will enjoy the many benefits a reverse mortgage has to offer. Keeping part of the reverse mortgage as a line of credit can help you manage financial difficulties. And in most reverse mortgages the line of credit will grow over time. This can be particularly beneficially for those who do not have as money saved for their retirement years as they would like.

You will want to determine what your annual percentage rate is to figure out the cost of money. In order to calculate this, estimations must be made about how much cash you draw from the reverse mortgage. Typically, a reverse mortgage is expensive in the short term but great in the long run.

At closing of the reverse mortgage, the value of your home is summed up by everything mentioned above. The funds for monthly income, line of credit and so on make up your home value. The funds for monthly income, the line of credit, and reserves make up the majority of a reverse mortgage. Everything else equates for the rest of the pie, per se.

As for the future of a reverse mortgage, equity reserves, line of credit and income received are going to make up the bulk of it. During the course of a reverse mortgage, you are not going to have to make any payments. This results in all interest accruing. Each month, the interest expense will be added to the balance of the loan.

As you continue to receive case from the funds for monthly income, over time these funds will begin to dissipate and shrink. But because of mortgage insurance, monthly income will continue regardless of whether the funds shrink or not.

As for the reserves, they can increase, decrease or completely run out. All of this depends on the interest rates and the change in value of your home. If your home value changes drastically, you can expect the reserves to change as well.

The reverse mortgage strategy is fairly simple as it deals with six different variations. The sums of these six facets make up the mortgage and determine how you will settle. If everything goes accordingly, you can benefit greatly in the long run using the reverse mortgage strategy. As with will any financial vehicle it is always best to speak to a qualified professional before you make your final decision.
About the Author
Adil Esmail is a real estate professional specializing in the Markham Real Estate market and a source for up-to-date real estate information. For more information on the Markham Ontario real estate market feel free to contact Adil Esmail. The Adil Esmail team would be more than happy to assist with all of your real estate needs.
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