The most important in all financial transactions is the monetary aspect. By that, it means, the manner of monetary distribution, interest rates, loan amount limit and monthly amortization. If you are planning to take out a reverse mortgage, you must orient yourself in knowing these factors in addition to other necessary requirements.
Reverse mortgage allows you to take advantage of your home equity while you reside in it. There is a limit though on the amount that you can borrow and that should not exceed the full value of your home. Also, the lending institution will not release to you the full home equity, because if they do, you can just imagine how huge your interest rates will be. It may also prove to be impossible to liquidate the debt if the full home equity is released.
You can receive the loan in various ways, either as a lump sum or through an arranged payment option. A ‘credit line’ is an unscheduled payment dependent on your preference of the amount and date of release. Simply put, similar to a credit card, you can request for it, when you need it until the credit line is exhausted.
A ‘tenure’ arrangement means that you can continue receiving equal monthly amortization as long as you continue to reside in the mortgaged residence. Tenure can also be modified and mixed with a line of credit, resulting to a monthly arrangement pay out and an intermittent additional payment.
A ‘term’ payment is a scheduled payment of fixed amount for a specified period of time. For example, you may arrange to receive $400,000 spread over a 5-year period. It can also be mixed with a credit line and turn it into a modified term payment. While you are receiving a regular fixed amortization, you may also request for immediate financial needs.
The most preferred payment arrangement is the ‘line of credit’ as this allows the borrower to control his spending according to his needs. Since most of the borrowers are also receiving benefits from social security and dividends from retirement accounts, home equity payouts simply serve as a buffer for unplanned or big budget expenses.
The reverse mortgage payout is tax-free and service fee deferred. It means that the monthly service fee ranging from $30-$40 is deferred until the contract expires. This provides initial relief for the borrower, however, by the time that the mortgage loan is liquidated and service fees need to be settled, you may be surprised that the deferred service fee can come up to thousands of dollars.
Finally and most importantly, as the borrower you do not need to make monthly repayments to your reverse mortgage unlike regular credit. The loan is repaid when you cease to occupy the primary residence and subsequently put it on the property market. The proceeds of the home sale is used to settle the outstanding amount and since the amount loaned should never exceed the property value, the excess will go to the homeowner or his estate.