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Find additional payment options for long term care
You have probably heard the term "reverse mortgage" in the past, but do you
know what one is? Essentially, whenever you place a reverse mortgage against
your home, you are placing a mortgage against your home that you are not going
to have to pay back for as long as you live in that house. This allows you to
turn your home's value into cash without worrying about having to repay this
loan each month.
Some of the ways in which you are able to receive this loan include:
- You can choose to receive the money all at once, in one lump sum.
- You can receive some of the money each month.
- You can establish a "credit line" account that has been funded with this
money. This will allow you to be able to decide when you want to have some of
the money and how much of the money you want to have.
- You can even have a combination of these payment methods.
Regardless of how you choose to have this loan paid out to you, it is important
to understand that you are not going to need to repay this loan until you die,
sell your home or otherwise permanently move out of your home. The only "
catch" here is that you do need to be 62-years-old or older in order to receive
such a mortgage.
As was aforementioned, with reverse mortgages you are not going to have to make
any monthly repayments. This means that you will not have to have a minimum
amount of income in order to be able to qualify for a reverse mortgage. In
fact, you can actually have no income at all and still be able to qualify for a
reverse mortgage.
Since there are no monthly repayments that need to be made, you will not have
to worry about losing your home if you do not make your monthly payment. You
should also know that any co-owner(s) that are listed on your mortgage would
also have to either die or move out of the home before repayment can be
demanded.
The best way in which to see how a reverse mortgage actually works is by taking
the time to compare it to a "forward mortgage." These forward mortgages are
the type that you use to actually purchase a home. While both types of
mortgages will create debt against your home and thus affect how much equity or
ownership value you have within the home, it is important to understand that
they do this in opposite ways.
Whenever you are trying to understand mortgages, there are two terms that you
must understand first:
- "Debt," which is also sometimes known as your "loan balance," is the amount
of money that you owe to a lender. This amount includes any cash advances that
have been made to you, plus interest.
- "Home equity" is the amount of money that your home would sell for, minus the
amount of debt that you have against it. For instance, if your home is worth
$150,000 and you have a $30,000 mortgage that still needs to be paid, then your
home equity would be $120,000.
More than likely, whenever you first purchased your home, you probably paid a
small down payment before borrowing the rest of the money that you needed in
order to purchase the home. You would then have to pay back this mortgage each
month. In doing so your debt decreased and your home equity increased. This
is because the amount of money that you owed (your debt) would grow smaller
with each repayment you made, leading your equity (ownership value) to grow
larger. With this in mind, you can see how a forward mortgage leads to falling
debt and rising equity. On the other hand, with a reverse mortgage you are
creating a situation in which your debt is rising and your equity is falling.
Thus, whenever your reverse mortgage becomes due you may find that you owe a
lot of money and that your home's equity is very small. You may even discover
that your home's value has decreased to the point that there is no equity left
at all.
As you can see, a reverse mortgage creates a "rising debt, falling equity"
situation for you. However, this is exactly what informed reverse mortgage
borrowers desire. They want to spend their home equity and not have to repay
for it while still living in their home.
You should know that there are some times whenever reverse mortgages do not
lead to rising debt and falling equity. This will occur whenever your home's
value grows rapidly or if your take out a loan upon which there is no interest
charged. In both situations, your equity will grow as your home's value
increases. Unfortunately, most homes' values do not grow at such a
consistently high rate and most mortgages do have interest charged on them.
For this reason, the "rising debt, falling equity" situation exists, which is
why the AARP does not endorse such mortgages.
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