Reverse mortgages are negative equity loans, in their purest form. They allow the borrower to take out a loan without the obligation of paying back the lender on a periodic basis.

Naturally, the lender has to make money somewhere, so they do it at the end of the loan. Interest simply accrues on the principal loaned to the borrower. At the end of the mortgage, the lender recoups the investment and makes its profit.

As a potential borrower one thing to be naturally concerned about is the interest accruing to such an extent that all of the equity in the home vanishes.

Remember though, several energies are working here. Some devour equity and other, more homeowner-friendly energies give to it.

Certainly the accruing interest cuts into the borrowers equity. Conversely, real estate appreciation greatly slows this process.

Appreciation usually adds to the homes equity, even with interest accruing against it from the reverse mortgage.

Borrowers are eligible for a specific monetary amount based on value, age and interest rates. Most dont use this entire amount. The reason is by not pulling it out of the line of credit it doesnt amass interest against the equity.

For example, the house in question is worth $200,000, and the borrower meets the criteria for a $130,000 loan. The borrower will take out and use all of the cash at once.

Basic math tells us interest will accrue and eat into the borrowers equity as fast as it can in this scenario. From the get-go, interest is accruing on $130,000.

With a fixed rate of 6.09% building interest against the equity, and 4% appreciation, it will take over twenty years for the loan to gather enough interest to consume the equity!

Continuing the example above, lets say the borrower only used one hundred thousand dollars right away. Twenty years from now, there would still be equity of over $100,000.

Most people dont take into consideration how powerful home appreciation can be, especially when looking at the negative side of the reverse mortgage.