How a reverse mortgage works

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A reverse mortgage is a type of retirement property. This financial service was launched in the U.S. and is now also offered in several European countries, including Germany and Austria.

A reverse mortgage is a loan agreement, which uses a property as collateral. The loan can be paid in a lump sum or in monthly installments. The homeowner retains ownership and can continue to live in his property.

With a securitized mortgage, interest and repayment is to be deferred. The debt burden is built – in contrast to the normal construction loan – from year to year, hence, the term reverse mortgage.

The loan repayment is only after the death of the borrower or when moving out of the property – for example, when moving into a nursing home. The heirs can get the loan from its own assets, using a new loan or by selling the property.

Or the bank recovers the property and pays any surplus to the heirs. The borrowers are protected from eviction as long as a partner of the borrower maintains residence in the house.

Reverse mortgages help homeowners who do not own any major financial assets and possibly earn a low income or have insufficient retirement funds.

Hence, a monthly payment of the loan agreement with the variant that the borrower remains in the home, similar to the construct of lifelong living right. In the U.S., the number of users of reverse mortgages has increased six-fold between 2001 and 2006 and rising steeply.

The problem for homeowners is that only high-value, debt-free property can achieve a significant retirement in a good location. Those who owns low value properties or still paying off a mortgage hardly benefit.

The homeowner can always expect only a much lower payment than would be mathematically shown by the market value and the purely statistical life expectancy.

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