There are basically four different categories of reverse mortgages and the basic difference among these types of reverse mortgage plans is their legal structure. Another difference among these categories of reverse mortgages is the method that enables the borrower or home owner to obtain the equity money up front. The four different types of reverse mortgages include the simple reverse mortgages, the reverse annuity mortgages, the reverse mortgage lines of credit and the shared appreciation reverse mortgages.
In the instance of the simple or direct reverse mortgages, the creditor as well as the borrower (in this case the home owner) is in agreement on the principal, or the amount of the reverse mortgage. While the borrower may prefer to use a lump sum to procure an allowance, this is not a requisite in a reverse mortgage agreement. On the other hand, if the borrower wants to receive the payment in instalments, the creditor and the borrower may agree on the schedule of the payment. In such cases, generally the payments are made to the borrower in monthly instalments. In effect, the mortgagee fixes a line of credit or the amount of loan that the home owner is permitted to utilize for the borrower's reverse mortgage. Having done so, the mortgagee makes withdrawals to meet the expenses of the recurring payments to the borrower and also charges an interest on the amount of these cash withdrawals. In simple words, the borrower or home owner pays interest charges on the money he has received up front on his stake in the property and not on the total worth of the reverse mortgage.
According to the mutual agreement between the borrower and the lender, the reverse mortgage may be arranged as a fixed-term reverse mortgage. The borrower and the lender may enter into an agreement to set the expiry date of the reverse mortgage five or more years later in the future. On the other hand, they may also agree to a term-plan reverse mortgage. Deviating from the normal practice in a fixed-term mortgage, the creditor can make the up front equity payments to the home owner during the period of the reverse mortgage. However, the borrower needs not reimburse the loan amount and the interest charges on it up to a time in the future, or till the home owner dies or leaves his property eternally.
It may be mentioned here that the period or lifetime imbursement plan would cause the simple reverse mortgage an open-ended or unrestricted credit. In fact, such an arrangement would in effect make the simple reverse mortgage to continue for the entire life span of the home owner or the borrower.
As discussed earlier, a reverse mortgage is normally recorded or registered against a property to sanction money needed to acquire an income spawning annuity (money paid at regular intervals) for the home owner or the borrower. Here the borrower or the home owner is free to obtain a part of his stake in the property in the form of up front cash payment. On his part, the lender or the mortgagee may withhold a part of the funds as paperwork charges. The remaining part of the funds is utilized by the creditor to acquire an annuity also known as an allowance or pension on behalf of the borrower.
In simple words, an annuity is basically an agreement wherein a buyer provides an insurance firm with an agreed amount of money in a single payment with a view to receive payments at regular intervals for a mutually agreed period of time stretching into the future. Such income-spawning products marketed by finance and insurance companies usually offer tax benefits and ensure a steady income through payments either every month, once in three months or yearly. Hence, annuity may also be termed as pensions or allowances.
Purchasing an annuity is similar to making a hazard-free endowment that ensures a person precise earnings either for a set period of time or for his or her entire life. In other words, the person who procures an annuity is known as the annuitant and he or she provides the insurance firm with a one time payment of substantial money and in return the company recompenses the annuitant with a intermittent payments or a fixed amount in installments. The payment made by the insurance company is known as blended payment as it comprises the basic principal amount as well as the interest. Normally, the insurance firms fix the amount of payment to be made to the annuitant on their calculation of the borrower's life expectancy. On the other hand, the interest rate on the principal amount is fixed on the basis of the time the annuity is set up. Normally, the rate of interest is fixed at the commencement for the total term of the annuity.
In fact, several types of annuities are obtainable with the different lenders, but basically they are only of three categories - fixed-term annuities, life annuities that make payments occasionally and life annuities that pay installments at an ensured time. In the instance of the fixed-term annuities, payments are made in installments periodically for a number of years that have been mutually agreed between the borrower and the lender. On the other hand, in the case of life annuities periodic payments are made in installments throughout the life of the borrower or home owner. If the annuity is done jointly for a married couple, the lender will make payments till the death of the last surviving spouse.
The life annuities with an assured period of time pay intermittently in installments. It is similar to the second type of annuity, but ensures that the payments are made for a fixed period of time even if the annuitant dies before the expiry of the annuity. In fact, among the three basic categories of annuity, this one is most advantageous for the borrowers as payments from the lender continue even after the death of the borrower. For instance, if the ensured period of the annuity is for 15 years and the annuitant dies after five years, even then the annuitant's estate will receive a one time total payment. This lump sum payment is calculated on the basis of the remaining due installments till the time of the termination of the annuity agreement.
Although only three major categories of annuities have been discussed briefly above, it may be noted here that each of these category of annuity has several alternates or variants, especially each category of the above mentioned annuities differ in their features and aspects. For example, the indexed annuity offers the yearly cost incurred for livelihood modification for the intermittent installment imbursements. Characteristics such as these augment the suppleness and protection for the annuity buyer. However, this arrangement has the potential to lessen the full amount of money paid by annuity. In fact, experts have felt the need for making exceptional prerequisites available for married couples procuring an annuity.
It is interesting to note that there is provision for combining the fixed-term and term-plan reverse mortgages together with an annuity with the view to fashion an income-spawn reverse mortgage known as the reverse annuity mortgage. In this instance, the borrower or the home owner not only keeps hold of the possession of the property, but also takes delivery of payments for a set term or for the entire life. In fact, the reverse annuity mortgage is outstanding and needs to be repaid only when the home owner leaves his property for ever, sells the house, when he or she dies or when the mutually set term terminates.
When a home owner procures a fixed-term reverse annuity mortgage, he or she actually gets the annuity imbursements for a fixed period. However, the home owner is entitled to receive annuity payments for his or her entire life on the procurement of a term or lifetime plan reverse annuity mortgage. In the second instance, the home owner or the borrower will continue to receive annuity payments for the entire life span despite having sold of the property or making the final settlement for the reverse mortgage.
Creditors normally enter into agreements for a period of time with one or more insurance companies to ensure the security of the money they have lent out. As a result of this the borrowers or home owners are not left with much alternative in selecting the source or the type of annuity. What is undesirable is the fact that via their annuity reverse mortgage plans the creditors are also able to restrict several aspects or characteristics of the annuity.
It is the lender or mortgagee who grants the total credit amount in the instance of fixing up a reverse mortgage line of credit. Once the creditor has approved the loan amount, the home owner or borrower can gain access to the pre-determined equity sum. The borrowers, however, have the freedom of choice to withdraw the ready money. It has also been found that there are many home owners or borrowers who don't withdraw any money from their reverse mortgage line of credit for a long duration. Nevertheless, they are confident and get pleasure from being aware of the fact that the money is always there at their disposal any time they require it. On the other hand, there are many others who may withdraw the whole money at one go.
To tell the truth, the reverse mortgage line of credit is not only an excellent credit financing whereby a home owner or borrower may get emergency funds whenever he or she needs some additional cash, but also offers them a peace of mind knowing that they have some reserves during their time of need. Nevertheless, there are times when the reverse mortgage line of credit may prove to be hazardous. Owing to poor economic planning, a home owner or borrower may use up the money too quickly and be dismayed to find that he or she has nothing in reserve when the actual need arises. Therefore, with a view to eliminate the risk factor in the reverse mortgage line of credit, the mortgagee may fix withdrawal restrictions whereby a borrower can only access his money in installments set for every month or year. Nevertheless, as financial suppleness is the keystone of the reverse mortgage line of credit, the borrowers are normally provided with the prospect of amending the withdrawal plan in the instance of a present economic liability ending or a new one coming up.
In the instance of reverse mortgage line of credit, interest on the loan is charged only on the actual amount of money taken out by the borrower and this provides the home owner with the opportunity to keep a check on the rising debt. If the home owner or borrower can cautiously handle the cash withdrawal amount and rate of occurrence, he or she can surely keep the liability from increasing by leaps and bounds. On the other hand, the mortgagee may also permit the reimbursement of the reverse mortgage liabilities by enabling the home owner to making payments into the reverse mortgage line of credit account to lessen the arrears.
It may be noted here that there are specific laws to control creditors from imposing their features in their respective reverse mortgage products. It must be borne in mind that since no more than an insurance firm is entitled to put up financial products that are based on life menaces on sale, no credit or loan offered by any credit union can be a lifetime plan. It is essential to remember that the law has only entitled the insurance firms have to proffer lifetime reverse mortgage line of credit, while the credit unions and other mortgagees have been limited to the fixed-term plan line of credit programs. Since the fixed-term plan line of credit programs are able to be renewed, the law aims to increase the plan's realistic attractiveness to the home owners or borrowers. All said and done, at the time when the reverse mortgage stretches to 75 per cent of the assessed worth of the property, the available credit will conclude and the borrower needs to repay the full amount of the liabilities.
An assortment of aspects was introduced to reverse mortgages soon after the reverse mortgage market developed in the United States. In fact, the shared appreciation reverse mortgage is one such variation or reverse mortgage following the evolution of the US market. The shared appreciation is a condition in reverse mortgage that considerably lessens the hazards of the creditor. Consequently, it augments the payment of equity advances as well as the ultimate charges for the home owner or the borrower. The condition in shared appreciation reverse mortgage lays down that the lender or mortgagee will get a share or proportion of any raise in the value of the property and the endorsement may happen any time during the period of reverse mortgage. On his part, in return for the share of the appreciation, the lender possibly will proffer greater amount of advance on the equity as well as lower interest charges.
On the other hand, the reverse mortgage rules are slightly different from that in the neighboring United States. The Federal Interest Act in Canada makes it mandatory for absolute revelation of the effectual interest charges, the authentic or accurate cost of interest to be paid or the entire cost of the mortgage. These stipulations in the Canadian laws may actually diminish the scope for the popularity of the shared appreciation aspects of reverse mortgage simply because the precise dollar value of the appreciation or rise in the property's value is likely to remain unidentified till the termination date of the reverse mortgage. All said and done, there are many innovative creditors to eventually hit upon ways and means to legally get around these controls set on lending. In such an instance, the lenders follow a simple strategy. They usually make an approximation regarding the proportion of the raise of the value of the property or appreciation and try to correlate it in terms of dollar value. This way, the lenders are able to work out the authentic utmost price of the mortgage for the borrower or home owner.
