How Do Reverse Mortgage Loans Work?

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A reverse mortgage loan, better known by its other name Home Equity Conversion Loan or HECM is a loan for the elderly. Its name is kind of self-explanatory, this loan depends upon your home equity. Your home equity is basically that portion of your property that you truly own.

The people of 62 years of age or above, are eligible for the loan. The loan allows you to keep ownership of your home and lets you stay in it for as long as you live. Moreover, the Federal Housing Administration provides insurance for the loan so there is no fear of any kind of scam either. Find out more about the loan to check for yourself whether it is suitable for you or not.

Reverse Mortgage vs. Conventional Mortgage:

The one very noticeable feature of this loan is the easy and affordable repayment methods. It lets you fulfill your needs and doesn’t burden you with high monthly loan repayments. You can control your monthly expenses. And there are no limitations as to when the loan has to be repaid. You are only bound to repay it when you leave the home, or sell it, or pass away (your heirs will be responsible for repayment in that case). You can also pay it off any time you feel comfortable without any detriment.

The loan lets you retain the ownership of your home side by side increasing your financial conditions. The main purpose of this loan is to help out the retired who have limited income. You don’t have to worry even if one or two loans are already due on you because this loan is not concerned with them. This is because it only deals with your home equity and not your credit score or balance.

Also See: How to Apply for Mortgage Loans

Who is Eligible for Reverse Mortgage Loan:

Following are the criteria which need to be fulfilled to acquire the loan:

  • Age at least 62 years.
  • Permanent residency in the home.
  • Complete ownership of the home.
  • Clearance of a financial assessment to ensure that you pay the taxes, maintenance, and insurance of the home.

You need to be according to the U.S Department of Housing and Urban Development standards if you want to qualify for the loan. Almost all houses get approval but there is a chance that the house on which a mortgage already exists might not.

Procedure to Get a Reverse Mortgage:

The loan application procedure is given below:

  • Fill out the application form.
  • Have a pre-loan consultation with an independent, FHA-approved reverse mortgage counselor.
  • Undergo a financial assessment.

A reverse mortgage, although a good means to increase your financial flexibility, might not be the best option for everyone. Because in reverse mortgage, a portion of your equity is given to you in cash. So if your home has other people’s share in it too, then this might not be suitable for you. It is always the best to consult the reverse mortgage counselors for loan information. You should clear away any doubts you have regarding the loan, its repayment methods, and how it works.

Make sure to have the answers to these basic questions:

  • Would this reverse mortgage loan help you after your retirement?
  • Would this help to increase your retirement stability?
  • How long do you plan on living in your home?

Pros and Cons of Getting a Reverse Mortgage Loan:

For people who think that retirement will be the ultimate doom of their well-established lifestyle, this loan is the answer to their problems. This can be used for various other reasons as well for which you take personal loans. Now you won’t have to worry about making ends meet after retirement. This will also help you maximize your Social Security benefits. Also, many lenders such as Reverse Mortgage Funding LLC have lower up-front costs.

Pros:

Following are some of the positive features of getting a reverse mortgage loan:

  • Accessibility: you can receive funds in any way you want i.e. either a lump sum or a continuously accessible line of credit. You can also avail the Term or Tenure options.
  • Lump sum: a lump sum of cash at closing. (Only available for fixed-rate loans)
  • Tenure: equal monthly payments as long as the homeowner lives in the home.
  • Term: equal monthly payments for a fixed period of time.
  • Line of Credit: draw any amount at any time until the line of credit is exhausted.
  • Existing Mortgage Payoff: you can use the money to pay off any existing loans you might have, just like how personal loans work.
  • No Monthly Payments: there is no restriction on making payments every month.
  • Minimal Out-of-Pocket Expenses: except the counseling fee, every other cost such as the closing costs can be covered by the loan.
  • No Extra Taxes: generally, the loan proceeds aren’t considered taxable income. However, do consult a tax professional to be sure.
  • Beneficial to Heirs: according to professionals, proper use of loan can help you increase your retirement savings. This, ultimately, can be beneficial to your heirs.
  • Access to More Funds: if the market value of your home increases, refinancing your loan can give you more amount of money.
  • Equity Ownership: after the complete repayment, the remaining equity belongs to you and your heirs.

Cons:

Some negative aspects of getting a reverse mortgage loan as given below must also be considered:

  • Increasing Balance: as the interest and fees on the loan accumulate, the amount to be repaid also increase.
  • Decreasing Assets: if you take a huge amount for the loan, a lien will apply to it. However, in any case, since you use your equity to get the loan, so your assets will decrease accordingly. Although you and your heirs will still retain your ownership of the house.
  • Higher Fees: loan fee might be higher than the traditional mortgage.
  • Effect on Benefits: you might lose your eligibility to gain other need-based Government-funded benefits such as Medicaid or Supplemental Security Income.
  • Sooner Due Date: when the ‘Maturity Event’ occurs, the loan becomes due sooner than before. Maturity events include the selling of the house, moving out of it, or the passing away of the last surviving borrower or his/her spouse. The loan will also become due if the homeowner fails to pay his property taxes or homeowners insurance, or fails to maintain the property.

Required Insurance: an HECM loan requires mortgage insurance premium as specified by the Federal Housing Administration.

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