Finance

Understanding reverse mortgage and its calculation

Using a passionately dreamt about and acquired home as security to obtain a loan, is not the easiest decision to make. But taking this credit to support medical expenses or college fees or to repair or expand the property, might be unavoidable sometimes. In fact, it can also be a source of income, because as the name suggests, reverse mortgages are where the lender pays the borrower.

Let us learn a few important formal terms in order to understand the concept of the reverse mortgage.

Home equity: The amount of money that one would receive if they sold their house, after paying all their debts on it. For example, assuming a property is valued at $1,000,000, if the uncleared dues against it are for $200,000, then the home equity would be $800,000.

Equity loan: A borrowing against the value of the home. The value of the home after having paid off all mortgage or other charges relating to it is only considered. This is done as an assurance to the lender that the money borrowed will be repaid.

In the example mentioned above, the equity loan eligibility would be for $800,000.

Reverse mortgage: A financial agreement in which a homeowner surrenders equity in their home, in exchange for regular payments.

Again, using the same example, a reverse mortgage would be giving up ownership of the house in exchange for periodic returns on the $800,000.

Returns on these loans can be a fixed monthly payment or a line of credit (LOC). LOC is a deal between any official financial institution like a bank and the borrower, where the maximum amount that a debtor can acquire against the loan is specified.

A direct mortgage insurance premium, origination fees, appraisal fees and other standard closing costs are involved in the calculation of the reverse mortgages. You could check for the reverse mortgage rates and use reverse mortgage calculators for accurate calculations. Evaluating the remaining home equity balance after a particular number of years or the outstanding loan balance after computing interest rates and such is possible with the help of free online loan calculators. Use it as a guide to your financial planning and investing.

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