Reverse Mortgage

To begin, let’s review the fundamentals and history of reverse mortgages. The term originated in the 1980’s with early products in which the lender paid the borrower rather than the borrower paying the lender. As a result of this, the product is referred to as a reverse mortgage. These reverse mortgages (RM) frequently came with severe disadvantages. Once the borrowers died, the residence became the property of the bank that gave the money, and at times, restrictions were in place that required the borrower to vacate the property if they lived too long. Interest rates were frequently variable, with no option for a set rate.

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Closing costs were frequently prohibitively high as well. The Housing Administration became involved, recognizing the product’s enormous potential, and new rules were implemented allowing borrowers to pass on home equity to their heirs, guaranteeing they would never be displaced from their home regardless of how long they lived, and protecting borrowers from home value volatility, among other benefits. As a result, reverse mortgages are an excellent alternative with minimal negatives today.

Thus, how does the RM operate? A reverse mortgage is comparable to a conventional mortgage in that it is a loan secured by real estate, namely the homeowner’s home. The significant difference is that the mortgage has no mortgage payment requirements. What method is used to do this? You must have equity in your home and be at least 62 years old to qualify for the RM. As a result, a computation is performed to ascertain the amount of equity that can be lent based on the borrower’s age, the interest rate paid, and the location of the home. This informs both the Housing Administration and the lender of the maximum amount they can lend without ever collecting a mortgage payment.

As a result, the lender can lend with little risk, but must defer interest payments until the homeowner either moves or dies. Foreclosure is rarely an issue, it occurs only when the homeowner violates the loan’s terms, such as failing to live in the home, failing to maintain the home in a reasonably safe state, or failing to pay property taxes and homeowners insurance. This results in a loan that is extremely tempting to a lender looking to earn interest on a low-risk loan.

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