Reverse Mortgage Ins and Outs
When it comes to home loans you have a choice between a traditional loan or a reverse mortgage, which is also sometimes called a home equity conversion mortgage (HECM). A reverse loan may look appealing at first, but you need to understand exactly how it works before you enter into a legal loan contract. The ins and outs of reverse mortgage agreements are briefly outlined below.
Closing Costs And Fees do Exist When You Sign a Reverse Mortgage Agreement
You may not realize it at first because the fees are “hidden”, but reverse mortgages do have closing costs. The reason those fees are not readily apparent is that they are taken off the top from the loan money received, as opposed to paid by you at a later date. You must be cognizant of those fees before signing an agreement with your lender or you may not receive the amount of loan money you initially expected.
Interest costs are also a concern when it comes to these types of home loans. Reverse mortgages do not come with the same monthly repayment obligations of traditional loans. However, since they take longer to pay off, interest has longer to accumulate. As a result, you will wind up paying far more than the initial loan amount in the long run.
HECMs May Not Convert All Home Equity to Cash
Another issue you must know about before signing a reverse loan agreement is that you can borrow against some of your home equity, but not all of it. There is a borrowing limit established by lawmakers to protect both borrowers and lenders from entering into unrealistic contracts. Your age, your home’s total value, and other aspects of your exact situation will be used to determine the total loan amount you can receive through an HECM. Therefore, the total amount which can be borrowed will vary greatly from one homeowner or property to another.
It is Very Difficult to Default on a Reverse Mortgage
A traditional case of defaulting on a home mortgage involves missed monthly payments. When payments are missed the lender can threaten to take the home away. Reverse mortgages have no such default risks. However, it is possible to default on them in another way.
Although you can’t miss a monthly payment on an HECM because they are not required in the first place, you are obligated to live in the home for the duration of the loan. If you choose to move out, are obligated to move out for medical reasons, or pass away the loan will go into default. However, the assets of you and your family cannot be taken by the lender to make up the remaining loan balance. Only the home itself can be sold. If a balance still exists after the sale of the home it will be erased by the lender.
Your Will Still Own Your Home
If the idea of selling your home and downsizing by moving to a small apartment in order to get extra money during retirement doesn’t appeal to you, you aren’t alone. Many people do not want to sell their homes. A reverse mortgage offers an excellent alternative because you will get additional money for living expenses while still retaining home ownership.
You Can Customize the Money Received Through the HECM
A final point to consider is that HECM money received can be customized to suit your requirements. For instance, you can create a credit line and borrow money against your home equity as it is needed. Alternatively, you can set up annuity payments, which will be made to you on a regular basis. If you have a major expense come up you can also ask for one large payment from the lender. The exact money transfer terms will be your choice.
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