Tuesday, July 30, 2013 - Article by: Julie A.Colangelo - Elite One Mortgage -
What is the difference between a Reverse Mortgage Loan and a Conventional Loan?
First let me explain that a Reverse Mortgage whether a refinance on your current home or a purchase money loan on a new home is exactly the same as having a conventional "forward" mortgage lien on your home.
Your home is not a liquid asset. In order to make the equity in the home liquid you need to use the home as collateral to get "cash out" in the form of a loan. You sign a promissory note, and a Trust Deed (or Mortgage) lien is recorded against the home and released once the "monies" are paid back in full. The difference between the Reverse Mortgage loan and Conventional loan is making a monthly payment. In the end both loans need to be repaid.
With a Conventional loan you make a monthly payment which mainly goes towards the interest on the balance. Very little is applied to the principal balance in the first 9-11 years. The loan balance remains the same and decrease over time.
With a Reverse Mortgage loan you do not make monthly payments. The interest accrues on the balance and each month they add the interest due to the balance; therefore the balance increases.
In a nutshell you either pay monthly on the loan until it is paid in full, or sell the property and pay off the loan at that time. In the case of a Reverse Mortgage all monies due are paid upon refinance of the loan or sale of the property.
With either loan upon sale any equity/monies left over after repayment of the loan is kept by the property owner.
Reverse Mortgage for Purchase
To determine the loan amount on either a Conventional or Reverse Mortgage purchase money loan the bank determines the amount they will lend and the buyer comes in with the remaining monies (in the form of a down payment).
On a conventional loan the loan amount is determined by what the borrower qualifies for income and credit wise as well as the offered interest rate. On a Reverse Mortgage the loan amount is determined by the borrowers age (minimum 62 yrs. old), the value of the property and the offered interest rate.
The purpose of obtaining a purchase money loan (whether Reverse or Conventional) is to reduce the amount of money needed to complete the sale.
If you have retired, would like to sell your existing home to upsize, downsize or move closer to friends and family, and do not want to have a mortgage payment then a Reverse Mortgage may be right for you.
Example using a Reverse Mortgage for Purchase loan based on a borrower 65 yrs. old:
You sell your current home for $350,000. After paying commissions and closing costs, and paying off an existing mortgage of $100,000 your net proceeds are $222,000.
You would like to buy a new home for $350,000. In this scenario you would need a loan to complete the purchase.
A Reverse Mortgage would lend $210,000. The down-payment required to complete the purchase is $140,000.
You will have $82,000 cash left over from the sale of departure home and no mortgage payments as long as you occupy the property as your primary residence.
For more information on Reverse Mortgage visit www.Julie4ReverseMortgage.com or contact me at (562)618-1644 or firstname.lastname@example.org.
Get the facts on the options available to you, and make an informed decision.
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