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Reverse Mortgage Types

The reverse mortgage helps the seniors over sixty two years old to use the equity of the home to supplement an existing income. Reverse mortgage is loan advance to the home without repayment unless the owner moves, dies, or sells the home.

In the United Kingdom, reverse mortgage is more common as lifetime mortgage. Hence, the owner never needs to repay as long as the owner lives in the home. The reverse mortgage lenders distribute the cash as lump sum, regular payment, credit line, or combinations.

In the United States, the basic types of reverse mortgage are single purpose reverse mortgage, federally insured reverse mortgage, and proprietary reverse mortgage. There may be more types in different countries, but the main idea is very similar.

Single Purpose Reverse Mortgage

The government agencies and non profit organizations offer this type of reverse mortgage. It is generally low costs. Although the government agencies may be local or state, the mortgage is available in a few locations only. The purpose of reverse mortgage is specific such as home repair, home improvements, and property taxes. And, the owner earns low or moderate income.

Federally Insured Reverse Mortgage

The U.S. Department of Housing and Urban Development (HUD) backs this type of reverse mortgage. This type is more commonly known as Home Equity Conversion Mortgages (HECM). The upfront costs are high especially if the owner stays in short period of time. So, this reverse mortgage is costlier than Single Purpose Reverse Mortgage.

It is the opposite of Single Purpose Reverse Mortgage in which the reverse mortgage loan can be used in any purpose. And, the mortgage are widely available anywhere. There are also no income or medical requirements.

Proprietary Reverse Mortgage

The private companies backed or owned this type of reverse mortgage. It is generally the most expensive type of reverse mortgage. However, the owner may get more than other types of reverse mortgage. Generally, it works the same way as the Federally Insured Reverse Mortgage.

Reverse Mortgage

The reverse mortgage turns the equity of the home into tax free cash. Reverse mortgage is more of a loan advance. While the borrower lives in the home, the borrower does not repay the loan.

Any senior who is sixty two years or older is eligible for the reverse mortgage. The home must have some kind of equity. And, the home is the primary residence of the borrower. Depending on the mortgage lenders, the mortgage lenders may require single unit, condo, or townhouse.

Reverse mortgage differs from home equity loan. The mortgage lenders pay the borrower the lump sum, regular periodic payment, line of credit, or combination. The line of credit allows the borrower to choose how and when to get payment. The repayment of loan only happens in reverse mortgage when borrower permanently moves, dies, or sells.

Let us compare with traditional mortgage to better understand reverse mortgage. Any type of mortgage creates debt. A debt is the difference between amount own and amount owe. Traditionally, the home equity increases and debt decreases. In reverse mortgage, the home equity decreases and debt increases.

At the time of repayment, the mortgage lenders use the home to repay the loan. The home pays off the principal, interest, and closing costs of reverse mortgage. Anything extra goes to the remaining relatives. In case of deficit, the mortgage lenders make up for the deficit.

Since the borrower retains the title of home on reverse mortgage, the borrower remains the owner of the home. The borrower is responsible for the maintenance, property tax, insurance, and utilities.

The mortgage interests in reverse mortgage are not mortgage interest tax deduction. However, the borrower can claim the mortgage interest on current first and second mortgage. Even though the borrower is still paying off the first and second mortgages, the mortgage lenders can allow the borrower to go on reverse mortgage.

The borrower can owe only on how much is the home. The mortgage lenders can only go after the house to pay off the mortgage. The assets and estate of the borrower are safe from the mortgage lenders. This is more commonly known as non-recourse loan.

Advantage Of Lease Purchase

Lease to own is way to purchase a home thru a lease. The buyer lease the home until the buyer decides to purchase the home. Within the lease agreement, the buyer finally purchases the home.

The buyer can choose between lease purchase or lease options. The buyer will absolutely purchase the home with lease purchase, while the buyer may decide to purchase the home with lease option. Here are list of advantages to the buyer and seller of the home.

Purchase home with bad credit history

The financial institution uses the credit score to see the ability for the buyer to afford the mortgage repayment. Any score above 660 places the buyer on good credit history. Sometimes, the debt gets a little out of hand. And, the buyer goes under bad credit score.

Lease purchase allows the buyer to catch up with the credit score. The duration of lease agreement gives the buyer time to repair bad credit rating. Usually, the lease agreement spans between one and three year. So, the buyer has one to three years to repair bad credit rating.

Locks the home price

The seller and buyer agree on the price of home. When the buyer is ready to make the purchase of the home, the buyer applies for mortgage financing with the agreed price of the home. If the home increases in value, the buyers can resale the home at a higher price.

Equity starts to grow sooner

If the buyer waits to purchase a home, the home may increase in value. The value of the home may increase in such a way that the home is unaffordable to purchase the home. As the buyer locks the home price, the buyer gains home equity right away. By the time of purchase, the home must have increase in value. Thereby, the buyer gains home equity.

Try before the actual purchase

The buyer can give the home a try. The buyer can know any defects for the home while the buyer is on a lease. If the buyer is comfortable with the location, and home, the buyer may go ahead to purchase the home.

None or little mortgage closing costs

The lease includes the lease and premium. The premium is added at the time of purchase. And, the premium is used as credit to purchase the home. The premium may be large enough to pay off the down payment and closing costs to finance the mortgage.

Costs less to maintain

The seller pays for the maintenance of the property while the buyer pays the lease. The seller pays for property tax, insurance, and repairs. After the buyer actually purchases the home, the buyer starts to pay the property tax, insurance, and repairs.

Tax deduction

The seller still owns the home while the buyer still paying the lease. The seller can claim the mortgage interest. The mortgage interest tax deduction is useful way to reduce tax each year. A big portion of the mortgage payment is mortgage interest. The mortgage interest is at the biggest at the start of mortgage. The mortgage interest gets smaller over time.

Lease Options

The lease options are another form of lease to own or rent to own. The buyer can buy his way to purchase the home. Within the agreed number of lease years, the buyer has the option to purchase the home with the agreed home price.

There are two options for the buyer. That is the lease option or lease purchase. The two options are very similar. The main difference between lease option and lease purchase is that the buyer will definitely purchase the home with lease purchase.

In lease option, the buyer may decline to purchase the home within the agreed number of lease years. Usually, the number of lease years range from one to three years. There are many unforeseen events that make the buyer to decline the purchase of home.

The buyer declines to purchase the home, when the home depreciates in value. That means the agreed home price is higher than the market value. The buyer may want to finance a home with the lower home price. So, the buyer might try to find another home in a lower home price.

The buyer also declines when the interest rate significantly increases. The mortgage payment significantly increases as the mortgage interest rate increases. The mortgage payment may be too high for the buyer to afford.

The buyer also declines when the home fits another type of homeowner. To buy a home are one of the biggest decision in our lifetime. The buyer worries to commit on a large purchase in which the home fits another type of homeowner. The best thing about lease option is the buyer can try before the buyer actually purchases the home.

The seller still owns the home while the buyer leases the home. Naturally, the seller can still use the mortgage interest tax deduction. A part portion of mortgage payment is the mortgage interest which is a substantial and beneficial for the seller.

A loan amortization schedule from loan amortization mortgage calculators shows the amount of interest on each mortgage payment. The mortgage payment can be broken down into principal, and interest.

The buyer finances the home price that is agreed upon on the agreement. The purchase price remains the same as the home depreciates or appreciates in value.

The lease includes the lease and premium. The premium will be credited to purchase the home. That means the equity grows at the start of lease. In the event of decline purchase, the buyer loses the all the paid premium.


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