Saturday, December 15, 2012

What are Reverse Mortgages ?

A normal mortgage is where a home owner takes a loan against property where the lender pays the borrower only a fixed percentage (60-70%) upfront . In case of Reverse mortgages, the house/property owner surrenders the title of the property to the lender. The lender in return does not pay the entire sum but a regular amount per month for an agreed duration during which the owner of the property continues to use the property. On the death of the owner and the spouse, die during the period of the RM scheme, the lender will sell the property, take its share and distribute the rest among the heirs. The reverse mortgage is named thus because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

Usually, RMs are available to those above a specific age, say 60 years. The aim is to convert an immovable asset, like property into an income-generating one while continuing to use it. The amount of income is predetermined as is the contract period. If the property-owner outlives the agreement period, the monthly payments will stop. How is the income for property-owner determined? There are three crucial factors property value, the period of the payout and the rate. The property is evaluated by professionals employed by the lender, and revalued after a period of time and the fixed income amounts are changed accordingly. In countries where the geriatric population is rising (such as Japan and Western Europe), RMs are popular. However, while it looks simple, lenders expose themselves to certain risks thanks to a variety of factors such as mortality, interest rates and real estate price changes. For the property owner signing away the roof over his head creates fears of loss of asset, eviction and inability to bequeath property. Besides, the legal, taxation and other regulatory aspects are still not clear.

Advantages of RM:
It helps you maintain your financial independence and standard of living
Allows you to remain in your home and retain ownership till you or your spouse is alive
Disadvantages of RM
The options can be confusing
They may be costlier than Loan against property

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