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Well. The word ‘mortgage’ is very familiar in the financial world. Generally, it is directly connected to loans or any other form of money lending. But, the term ‘reverse mortgage’ is little confusing and new with most of the developing countries. For your knowledge, the term ‘Reverse Mortgage’ is very familiar with developed countries and recently introduced to most of the developing countries. Those who really like to know more about this term can read this article to get a good awareness.
In an ordinary mortgage loan, the person who is borrowing the loan from a lending institution or bank should provide an assurance to the company that, he will repay the loan within the agreed time. To cement his assurance, the borrower pledging his property or his home to the institution against the money he borrowed from them. If a borrower fails to repay the loan the stipulated time, bank has authority to sell his home or property to recover the loan amount and its interest.
In “reverse mortgage” a person who has own home but no regular income, can pledge his home to the bank to receive loan. This amount can be received as lump sum at the beginning or as equal monthly, quarterly and half yearly or even yearly installments depends on how he wants to receive the loan amount. Here, the borrower has right to live in his home till the end of his life and doesn’t have any responsibility to repay the loan that he accepted on his home.
Generally, a person who plans for a reverse mortgage should complete an age of 60 years. Such loan has duration of maximum 15 years. However, the lending institution can decide the duration if required. The loan amount shall be equal to the 60% value of his home. Lending institution or bank has the right to decide interest rate for such loan. Interest can be calculated as fixed or floating but, bank has to inform the details to the borrower and he should agree the same before proceeding to further.
Borrower can use the loan amount as he wish. But, the amount should not be used for such activity like gambling etc. He can use the same to the maintenance of home, treatments or to bear living expenses etc..
How a bank can recover the amount what they given as reverse mortgage loan?
With reverse mortgage, a person can pledge his home for getting loan and he can stay in the same home till the end of his life. If a person dies or leaving the home permanently on before the loan duration, bank has full right to recover the loan amount and interest by selling his pledged home.Prior to such action, bank is liable to provide enough time to the borrower or his family members to repay the loan amount with interest. If they are repaying the amount in full with interest, bank should give the home back to them immediately, without further claim or proceedings.If they fail to repay the loan within stipulated time, bank has right to sell the home to recover there given loan and interest amount. But, if any excess amount from the selling, i.e. if bank had received a selling price that is more than the loan and calculated interest, bank is liable to hand over such excess amount to the borrower or his relatives.
This is all about the reverse mortgage term that you should aware. I would like to drag your attention on some disadvantages and points to consider:
1. Reverse mortgage is good for those who are aged couples and no one there to take care of.
2. It is only best for those who are aged more than 60 years.
3. While applying for reverse mortgage, if you are and old couple, you are required to as the possibility to be the joint applicants.
4. Interest rates in reverse mortgage are commonly high. You should ask and get all the details from the lending organization on this regard, prior to move further.
5. Risk weightage of the loan can be decided by the banking regulatory board and that is controlling the rate of interest. Risk weightage is different in countries and that may result difference in interest rates too.
6. Before applying loan under reverse mortgage, a study and comparison on the interest rates of various organizations and the other factors will give better chance to select the loan from a best organization. You should be well aware about any kind of hidden costs that may be applicable.
7. In most cases, the duration for such loan is maximum 15 years. If a borrower survives the duration, he can still live with his home but will not any money from bank for further. A loan with maximum duration is the only solution to recover such situations.
8. A pledge property will be reevaluated once after 5 years. At the time, there could be difference in the value of the property. A borrower has full right to decide whether he needs to continue with loan or terminate the same under new conditions after the revaluation. If he is not willing to accept new conditions, the lending organization has right to stop further payments. In such situation, the borrower liable to the amount what he accepted as loan till the date and also liable to repay the amount with its interest to the lending organization.
Hope you have understood well about the mentioned term ‘Reverse Mortgage”. You can inform me once if you feel that I have missed any important points or you have any points that required me to add with this article to help others.