Reverse Mortgages

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					Reverse Mortgages – Borrowing Against the Equity in Your Home

By Darryl King

For many people their family home is their most valuable asset. With most of
their wealth tied up in housing, many retired people are asset rich but cash
poor. Reverse mortgages enable older homeowners to access some of the
equity in their house without selling it.

Reverse mortgages have advantages for many older homeowners. However,
others may find a nasty surprise if they decide to sell their house and move
into alternative accommodation.

A reverse mortgage involves a homeowner borrowing a lump sum or periodic
payments from a reverse mortgage provider with the loan and interest
secured against the homeowner’s home. Interest on the amount borrowed
accumulates over the period of the loan and no repayments are made until
either the property is sold or the owner dies.

Most reverse mortgages have similar features, including:

         the loan is limited to a percentage of the value of the home – with the
          percentage increasing with the age of the homeowner,

         interest is accumulated on the loan at a variable interest rate,

         the interest rate is generally a given percentage, for example 1.5% or
          2%, over the major banks’ variable mortgage rates,

         the homeowner has guaranteed residence in the house,

         the loan, establishment and other fees and accumulated interest are
          not repayable until the owner sells their property, dies or otherwise
          moves permanently out of the house; and

         a no-negative equity guarantee ensures that the value of the loan will
          not exceed the net sale proceeds of the property.

The terms of the loan will also contain provisions designed to protect the
lender and the future realisable value of the property, for example by requiring
you to maintain and insure your home.

Reverse mortgages are also called reverse annuity mortgages or home equity
release loans.

What are the benefits of a reverse mortgage?

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If you have a mortgage free home but are short of cash, using the equity in
your home to borrow money may enable you to enjoy an improved quality of
life, to assist family members, to enjoy extras such as a holiday, etc. Other
benefits include:

         the homeowner retains ownership of their home; and

         as the homeowner is given guaranteed residence in the property, there
          is security for the homeowner.

What is the downside?

There are a number of potential disadvantages with reverse mortgages. The
most significant include:

         with establishment and other fees added to the loan and interest
          accumulating over the life of the loan, the cost of a reverse mortgage
          can be significant,

         the value of the equity in your home may be eroded quickly,

         the loss of equity in your home may reduce your options should you
          later wish to sell your home to move to alternative accommodation.

What are my other options?

Alternative options you may wish to consider include:

         selling your home and moving to a cheaper property;

         reducing expenses;

         borrowing from family members;

         taking a part time job; and

         selling a portion of your property.

Seek advice

If you are contemplating taking out a reverse mortgage it is essential you
obtain independent advice from your lawyer. It is important that you fully
understand the terms of the reverse mortgage - and the longer-term
implications for you.

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