Reverse Mortagage

It is an instrument to derive cash flows from one's owned house. This instrument is particularly important for the elderly, who have got either no regular source of income or their income is not sufficient to meet their needs, but they have a house in the form of an immovable asset. Before the instrument of reverse mortgage was allowed by the budget 2007, the options that were available with the elderly was either selling the property or giving it out on rent. Thus for an assured monthly income the person had to move out of his home which he naturally would have cherished besides the harrasment of finding a new house with its attendant problems such as security, neighbourhood, rising rent, distance from the people who have been their neighbours for several years. The pain of separation in the Twilight years of one's life can be very taxing. In this situation reverse mortgage becomes very important. The difference between mortgage and reverse mortgage is that while in mortgage one pledges a certain property with the bank for several years in return for a lump sum payment, which has to be payed in instalments over a period of time. In the case of reverse mortgage, the process is the same, but instead of a lumpsum payment, a monthly income is given to the mortgagor, besides him being entitled to live in the house he owns. The mortgagor can live in the house even when the period of his mortgage has expired and he can continue to live in the house till his death. After the death of the mortgagor, the bank takes over the property and gives the option to the legal heirs either to pay off the mortgage with the interest due and take possession of the property or in case of their refusal the bank puts the house on the market and utilises the proceeds to neutralise the mortgage and the balance if left over is credited to the legal heirs. In case of the market value of the property being less than the mortgaged amount, The bank bears the risk and absorbs the loss. Thus reverse mortgage is an instrument for providing security and independence to the elderly. Check out - http://www.rediff.com/money/2007/apr/20perfin.htm