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What is a Reverse Annuity Mortgage?

April 23, 2011 Leave a comment

               A Reverse Annuity Mortgage (RAM) is an interesting type of mortgage that can be obtained once you pay off your original mortgage. This mortgage allows the bank to pay you monthly payments! Sounds interesting (and a bit confusing). Let me clear somethings up. If you pay off your mortgage, you are said to be “free & clear”. You know have a tangible asset (your house) that you are free to sell or hold. The bank realizes you have that ability to liquidate your assets (sell your house) and retreive that money at a later date, so they give you money up front. Once you sell your house, you own them that amount off your house.

Here’s an example:
Your house is worth $100,000.
Your house is free & clear, which means you havepaid off your mortgage.
You decide you get a RAM, allowing the bank to pay YOU.
The bank pays you $300 a month.
After five years, you decide to sell your home.
The amount the bank paid you over those five years was $18,000.
But over those 5 years, your house appreciated to being worth $120,000!
Once you sell your house for $120,000. you pay the bank the $18,000 that they gave you, and your off your way!