Reverse mortgage is a popular in the West among senior citizens who want to tap their realty property for cash.
Ashish Gupta outlines some legal aspects of reverse mortgage
In the present day circumstances of cash crunch, property can be a valuable source of getting real estate funds, without physically disposing off the property.
As a concept, reverse mortgage is of immense use in unlocking the otherwise illiquid asset of property. Hitherto immovable property has been treated as one of the most illiquid assets. Reverse mortgage unlocks the liquidity potential of this real estate asset. It helps the owner get a return from his immovable property, without having to part with it. The owner can continue with the possession of the property during his lifetime.
WHAT HAPPENS TO TITLE?
In case of a reverse mortgage, the realty property owner surrenders the title of the property to a financial entity. The financial entity doesn’t pay the entire amount to the owner upfront. On the contrary, it pays out a regular sum each month for the agreed time.
HOW IS IT DIFFERENT FROM MORTGAGE?
Reverse mortgage is different from mortgage. Mortgage is a form of hypothecation of the property to a bank, as a security for a home loan. A common form of security which a bank insists on is the mortgage of the house for which the home loan is being availed of by the borrower.
Mortgage refers to the transfer of interest in a specific realty property for the purpose of securing either the payment of money advanced or to be advanced by way of home loan, or an existing or future debt.
The transferor is called a mortgagor, the transferee is called a mortgagee, the principal money and interest that are secured by the mortgage are called the mortgage money, and the instrument by which the transfer is affected is called a mortgage deed.
A reverse mortgage is available to those above a specific age. The aim is to use the property and make it generate a return while in use by the owner. The amount is paid out each month is for a specific period of time.
RISK OF FINANCIAL INSTITUTION
The financing institution has to bear the risk of the individual outliving the agreement. At the expiry of the agreement period, the monthly payments to the owner stop. The monthly payout depends on the value of the realty property, the term of the agreement and the rate of payment. The valuation of the property is to be done by experts. The entire payout mechanism calculation and computation depends on the law of probability.
Courtesy:- TOI dt:- 17-10-09
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