How Does a Reverse Mortgage Affect the Equity in My Home? Read here for examples of how a reverse mortgage depletes your home equity!
A reverse mortgage is a popular financial product that is used by many retired individuals who need to tap into their home equity, but do not want to have to sell their home. While this can be a great product, a reverse mortgage can severely impact someone’s home equity over time.
Initial Withdrawal
The first way a reverse mortgage affects home equity in your home is through the initial withdrawal. A reverse mortgage can be taken either as a lump sum or through monthly payments. Once you receive proceeds from the reverse mortgage, you instantly have a loan against your home and your home equity will decrease by that amount. If you opt for monthly payments over a lump sum, your initial home equity reduction won’t be as sever.
Interest Accrues
Another way a reverse mortgage affects home equity in your home is through interest that accrues. Interest on a reverse mortgage is often higher than the interest on traditional mortgages. Each month interest will be charged to your loan and since you are not making monthly payments, your loan balance will continue to grow exponentially. You can minimize the interest growth on your reverse mortgage if you minimize the amount you borrow and avoid taking an initial lump sum.
Origination Fees
The last way a reverse mortgage affects home equity in your home is through origination fees. Origination fees for a reverse mortgage cost up to $6,000. These fees can be either paid out of pocket or lumped into the outstanding loan balance. By lumping the origination fees into the reverse mortgage balance, you will in turn decrease your home equity. Also, the origination fees will accrue interest if they are not paid out of pocket at closing.
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