Eastern philosophy says that when divinity creates challenges, it first creates a solution to that problem. Somehow modern financial thought is likewise. There are many financial challenges that one faces, but luckily there are solutions to that problem.
For instance, you might go weak and over extend your credit far beyond repair. That is where bankruptcy proceedings can be the way out. Not a pretty way out, but a way out nonetheless. Then again there might be need to temporarily spend more money than you have. Lines of credit, credit cards, personal loans, and payday loans might be the solution.
When I was researching these options, I came across one that was very interesting. For older people, who have built up a home in their lifetime, but now need money for their daily or special expenses, where would they turn to? Luckily eastern philosophy or not, there seems to be a solution nonetheless. One alternative to consider is that of a reverse mortgage.
In this kind of mortgage, and hold your breath here, the borrower does not have to repay. Could that actually be right? Well kind of. If senior citizens have built up equity in their homes, they can actually, borrow a lump sum or a stream of money against that equity. Unlike regular mortgages, they do not have to make periodic payments. This is because the requirement to repay the borrowing is triggered by specific situations.
Some of these specific situations are: in case the old borrower decides to sell the property. In most such cases, the reverse mortgager would have first right to the money, or second in case the original mortgage was still running. Another common event is the demise of the old person who borrowed the money. In this case too the lender takes possession of the property and disposes it off.
The only other situation is that the borrower discontinues using the home as a place of residence. This could be because, she or he probably moves into an old age home or something similar.
The important point to keep in mind is that an option such as the reverse mortgage enables an otherwise illiquid retiree to get liquidity and the ensuing peace of mind. This peace of mind is driven by the fact that there are no periodic payments to take care of.
Naturally, like any other financial arrangement, the reverse mortgage too is subject to various regulations and legislations. In many territories, there is a minimum age set for an issuer to write such an arrangement. In some other territories, there is a provision that allows a borrower to actually avail of sequential multiple borrowings of this nature, assuming that the equity or value of the underlying property is escalating.
Though the logic of this mode of funding is simple to grasp, the computations that go into reaching the mortgage able amount is anything but trivial. Factors considered include, the overall interest rates prevalent in the economy. The equity built into the property. The market value of the asset. The age of the borrower. Mode of funding – lump sum vs. line of credit. And then there are many more.
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