Reverse Mortgage Loans have a long list of disadvantages but have their own advantages too, especially if one does not have dependants and children.
SOME TIME back I received a letter from one Ghulam Haider (name changed) hailing from Rajbagh, Srinagar. The letter was basically in response to one of my columns, in which I had discussed about special scheme for elders introduced in August 2006 in India. Claiming himself a ninety year old, but hale and healthy man, Ghulam Haider sought detailed information about the financial product which can fund his living. He owns some house property in Dalgate and wants to use this house to fund rest of his life.
This ninety year old man is basically looking for a financial product called Reverse Mortgage Loan, which has made it possible for the elders to generate a regular cash flow. In case of retired persons this financial tool can also supplement their retirement income even while they live in their house.
Senior citizens are always supposed to get a special treatment. Be it their any mode of travel, matters related to their health or availing financial services, elders, respectfully called as senior citizens, deserve a special deal. As far as financial services are concerned, banks and insurance companies have tailored specific products for this class of customers with an aim to make their living comfortable. Even as some banks have introduced the product, we have yet to see Reverse Mortgage Loan being extended to the customers in J&K state. Some nationalized banks do have such scheme in place, but they haven't shown any interest in selling this product here.
There may be an argument that this place (Kashmir) doesn't require such product because of the healthy social set-up, especially within families. But keeping Reverse Mortgage Loan product in its basket is not also bad, as there is possibility of a crowd of Ghulam Haiders who may be keen to fund their living through this scheme.
But, is it wise to bank upon Reverse Mortgage Loan? To find answer to this question, elders have to first understand the mechanism of this financial tool. Generally speaking, Reverse Mortgage Loans have a long list of disadvantages but have their own advantages too, especially if one does not have dependants and children and want to lead rest of his life in luxury. Before deciding to avail the loan facility, it is of utmost importance that the person discusses the proposal with his family and more importantly with a financial advisor too. One should make a sound decision that he will not regret.
Reverse Mortgage Loans, also known as home-equity conversion mortgages, turn equity into cash in several ways: monthly payments, one-time payouts or a combination. The amount a homeowner can access varies according to his age, valuation of house, current interest rate scenario and the loan processing and documentation fees. This financial tool can be a source of ready cash when it's needed, similar to other investments. But it has to be remembered that anything that affects ones bottom line that too when his earning potential is limited, taking out a reverse mortgage isn't a wise decision. So it is important that before jumping for the product, one should know advantages and disadvantages of the scheme.
They must understand that Reverse Mortgage Loans are exactly the opposite of conventional loans. Or we can say that Reverse Mortgage is the mirror image of the convention home mortgage. With the help of Reverse Mortgage Loan, owners who are 'house rich but cash poor' can have the luxury of living in their own houses and still meet all their financial obligations. The factors that are not taken into considerations are the income and medical histories and no medical tests are performed. The beautiful thing about reverse loans is that as long as borrowers meet criteria of being the right age and owning a house, they don't even have to have an income source at all to be considered.
Precisely, Reverse Mortgage is a financial tool which paves way for a customer to get money against the future value of the house and the borrower needn't pay back until he sells the home or dies. Here it is to be noted that in Reverse Mortgage loans, debt gains and the borrower's equity decreases.
However, everyone doesn't qualify for availing the benefits of this financial tool. The minimum age for availing this kind of loan is 60 years and above all the person should be resident and the sole owner of the house. Notably, no loan is granted against the ancestral property under the scheme. It is mandatory that a person seeking financial assistance under the scheme actually resides in the house. Against the valuation of the house, 80 to 90 per cent is released in the shape of a loan and carries a rate of interest, fixed or floating, depending upon the market condition.
There are disadvantages of a Reverse Mortgage Loan too. The greatest concerns to a Reverse Mortgage Loan is the fact that, should something happen to a borrower before the bank will give the legal heirs of the borrower the first right to settle the loan and they may be faced with a rather large lump-sum payment. The house will be sold off if legal heirs fail to settle the loan. However, the bank will pass on any surplus to them after adjusting its loan amount along with accrued interest.
If one is considering to fund his living through this product, then it is very important to understand as to how the loan works. The person should evaluate his responsibilities and rights. Here counseling is a must. It is very essential to understand that the money that one will be availing as a loan will be the same that one could have left ones children as inheritance. In succinct, one should go for Reverse Mortgage Loan only in dire consequences or if one has no one to leave his house to. By understanding the pros & cons of this financial tool, one will be able to make a better decision on whether to move forward with this kind of loan or not. After all it will be a decision having an impact on ones future life.
(The views are of the author & not the institution he works for)