A reverse mortgage is a type of loan which is specially designed for older borrowers who are typically resourced rich but cash poor. Under the mechanism of reverse mortgage, at the beginning of the loan tenure, house owner completely owns his house, with time the bank gives the periodic instalments, through which, the stake of the bank in the house keeps increasing and the owner’s ownership keep decreasing and at the end of the tenure, banks completely owns the ownership on the house. In other words, it is just the opposite of home loan. Any homeowner above the age of sixty-two years can use his home or portfolio of home assets to borrow against the value of the homes to receive funds either on a lump sum basis, or fixed monthly payment or line of credit going forward.
Upon the death of the borrower, moves away permanently or sells the home, the entire loan balance becomes due and payable. As per the Federal regulations, the lenders need to structure the transaction, in such a manner that the loan amount does not exceed the home’s value and the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance exceeds the worth of the home. The two reasons for the above possibility can occur with a drop in the home’s market value or if the borrower lives a long time.
Reverse mortgages can be used to meet the demand for the required cash to the aged people. These can be a continuous source of liquid cash, however; these loans can be costly and complex being subject to scams several times.
To mention in detail, in a reverse mortgage, the lender makes payments to the homeowner instead of the homeowner making payments to the lender. The homeowner can choose how to receive these payments and only pays interest on the proceeds received. The homeowner does not need to pay anything up front since the interest is rolled into the loan balance. The title of the ownership also remains with the home-owner. Over the life of the loan, the homeowner’s debt keeps on increasing and reducing his asset value over the period.
The lender retains the sale proceeds from the home to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees, on the death of the home-owner. However, any excess sale proceeds beyond what was originally borrowed go to the homeowner in case he is alive or the homeowner’s estate otherwise in some cases however the heirs may choose to pay off the mortgage to retain the home. The reverse mortgages are non-taxable.
There are three types of reverse mortgages including Single Purpose Reverse Mortgage, Home Equity Conversion Mortgage or HECM, which is the most common type of reverse mortgage available and Proprietary Reverse Mortgage.
A reverse mortgage scheme can be ended, however paying through different structures which includes lump sum payments, Equal monthly payments, Term payments, Line of Credit, a hybrid of equal monthly payments and line of credit, and a hybrid of term payments and a line of credit.
A reverse mortgage can be a good option to get cash when home equity is the biggest asset, and there is not much burden to meet the basic living expenses. A reverse mortgage allows to continue living in the home subject to the payment of property taxes, maintenance, and insurance, however taking out a reverse mortgage means spending a significant amount of the equity on the accumulated interest and loan fees.
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