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Equity Over There, or Equity Right Here
March 8, 2011 by Rich Donohue · Leave a Comment
The subject of equity is a part of virtually every conversation about Reverse Mortgages – at least the ones of which I have been a part. Most people have an idea of what equity actually is; in that it is something of value expressed as a dollar figure. As it relates to a discussion of a Reverse Mortgage, most potential borrowers think of the equity in their home as the difference between the home’s market value and the balance due on any mortgages and liens. In other words, the dollar amount that could be converted into cash if the home were sold. In this way of thinking, they are one hundred percent correct.
We often hear the comment that as time passes, the Reverse Mortgage will “eat into the equity of my home.” This is less true than it may seem on the surface. While the Reverse Mortgage will increase in size due to the accrual of interest and mortgage insurance, thereby displacing some of the equity as it exists at that moment, there are other forces acting on the valuation of the homeowners’ equity at the same time. In the realm of real estate finances, a snapshot in time does not tell the complete story. The valuation of real estate is on a time continuum; that is, it varies [mostly] up and [occasionally] down due to market conditions. Thus, we need to step back a bit and look at the whole forest rather than one tree. While it may be true that on the day your Reverse Mortgage monthly statement arrives in the mail, your equity has diminished by one month’s worth of interest; your home is most likely travelling on its path to increased value – and as it goes this route, your equity increases.
Finally, as we look at the word “equity” in the dictionary, there are other words with similar meanings. It now becomes easy to see that Equity = Capital = Wealth, and we can then visualize another concept – something I will call Pocket Equity. Before you close on your Reverse Mortgage, many of you will still be paying monthly payments on your mortgage(s), Home Equity Loans and/or credit cards. So, it follows that the equity that was in your pocket (or bank accounts) has diminished and is now in the possession of your creditors. While you are concerned about the equity in your home, you are reducing your Pocket Equity and probably not living the life style you deserve. After closing on the Reverse Mortgage, you can still watch your home’s equity move with the increased value of the real estate, and watch and feel the increased equity in your pocket without having to make those monthly payments.
Remember, you’ve got a lot of living to do!
