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Reverse mortgage Print E-mail
Reverse mortgage is sort of a loan which is extended to senior citizens against their property. It gives the option for senior citizens to convert an illiquid asset into continuing cash flow in the form of loan advances. The most important aspect of reverse mortgage is that the homeowners can continue to stay in their homes for as long as they live. What is the difference between mortgage and reverse mortgage? Well, in a mortgage, a lump sum amount is borrowed initially against the indemnity of the house, and it is paid back in monthly installments, some part to cover the principal while the rest covers the interest. Thus, the home is the security which is pledged to the financial institution against which the loan was given to you. In the case of reverse mortgage, the home is already owned by you and you pledge this property for loan. The bank will ensure a cash flow for the homeowner for as long as they want. Let us take an example of reverse mortgage. Let us consider that a senior citizen takes a reverse mortgage loan. He will then be getting monthly payments or a onetime lump sum payment based on the interest rate prevailing at that point of time. They can continue living in the home till the time of death or when the decide to move out of the property or sell the property. Post death or when they decide to sell or move out of the property, the reverse mortgage loan becomes due. Then the heir to the house will have the choice to pay back the loan amount and reclaim the house or otherwise, the property will be sold off by the bank and any amount in excess of the loan outstanding will be given to the heir. But in case the value of the property is less than the loan outstanding, the bank bears the risk and the heir will not have to pay anything. The homeowner has to ensure that taxes and insurance premiums against the property are clear. Any lapse on the part of the homeowner could cause a default in the reverse mortgage agreement. One good thing about reverse mortgage is that there is no restriction on the use of loan advance. The funds can be withdrawn and invested in some instrument or can be spent as deemed fit by the homeowner, there is no legal restriction to it. However certain federal government backed programs do have some restrictions regarding how the loan advances can be spent. There are however other options to reverse mortgage. Once could be that you sell the property and move to a smaller house or to a less expensive location. However, selling and moving costs can be quite high, one should take these into consideration.


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