How Is the Interest Accrued on a Reverse Mortgage?
A reverse mortgage has become a great tool recently for seniors to be able to obtain a more financially stable retirement. Although reverse mortgages are expensive in terms of interest and other costs, they can provide the necessary supplemental income needed for a more comfortable retirement. Here is a look at how interest is accrued on a reverse mortgage.
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Significance
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A reverse mortgage is designed to provide seniors with money from the equity that has been built up in their home. Reverse mortgages can be taken out any time after the senior reaches 62 years of age. It works exactly the opposite of a mortgage and no payments are made until the owners no longer need to live in the home. Any senior who has significant equity in their home can qualify for a reverse mortgage.
Function
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Like any other mortgage, there are many fees attached. Closing costs apply when the reverse mortgage is obtained, and there are higher front end costs than are on a typical mortgage. Since no money is actually paid to reduce the principal, the amount of interest on this type of mortgage is high.
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Considerations
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A reverse mortgage loan continues to build interest at a rapid rate. The amount of interest increases every month because it is charged on the total amount owed, which includes the interest from the previous month. If there were an interest rate of 6 percent, and the amount borrowed was $100,000, then the first month's interest would be $500. The second month would include this amount for a total of $100,000 plus $500, which would make the interest for the next month at $502.50. Obviously, the interest accumulates rapidly, which also quickly deteriorates the amount of cash available.
Effects
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Other charges also apply on a reverse mortgage that will further make it more expensive than a traditional mortgage. This includes a monthly fee for the mortgage insurance, which is a standard rate of 0.5 percent.
Misconceptions
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Many people believe that when a reverse mortgage is obtained that the house becomes the property of the lender. This is not true and they cannot force the owner to leave as long as taxes and the property are maintained. A reverse mortgage obtained from FHA, which is also called a Home Equity Conversion Mortgage (HECM), is insured and the mortgage can never become more costly than the home is worth. It is, however, possible with some other reverse mortgage products.
Warning
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Seniors can get access to the money in their reverse mortgage in several ways. This includes a lump sum amount, monthly payments, a line of credit, or some kind of combination of all three. Depending on how the money is received, and what is done with it, it may affect the recipient's ability to get Medicare. A financial advisor should be consulted prior to applying for a reverse mortgage.
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References
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