However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don't make monthly mortgage payments. The loan is repaid when the borrower. Interest and fees are added to the loan balance each month and the balance increases. When any of these cases occur, the reverse mortgage loan matures and is payable.
The most common method of repayment is to sell the house, where the proceeds from the sale are used to repay the reverse mortgage loan in full. Usually, you or your heirs will assume responsibility for the transaction and receive all of the remaining equity in the home after repaying the reverse mortgage loan. Reverse mortgages are like traditional mortgages, but in reverse. Instead of you paying the lender, the lender pays you.
You only repay the loan once you die, sell the house, or move for at least 12 months. Think of a reverse mortgage as a conventional mortgage in which functions are changed. In a conventional mortgage, a person takes out a loan to buy a home and then pays the lender over time. In a reverse mortgage, the person already owns the home and takes out a loan in exchange for it, obtaining a loan from a lender that may never necessarily repay.
Once a lender funds a reverse mortgage, borrowers use the money as stipulated in their loan agreement. Keep in mind that the interest rate on reverse mortgages tends to be higher, which can also increase your costs. As with an FHA loan (another HUD-backed mortgage product), you'll have to pay a mortgage insurance premium (MIP) with an HECM. Home Equity Conversion Mortgages (HECM), the most common type of reverse mortgage, carry a series of one-time fees and ongoing costs.
Mortgage insurance premiums paid by borrowers go to a fund that covers lender losses when this occurs. Supplementing retirement income, covering the cost of necessary home repairs, or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage income, according to Bruce McClary, spokesman for the National credit counseling Foundation. Instead, you can borrow up to 60% or more if you're using the money to pay off your term mortgage. Since reverse property mortgages are not federally insured, you won't need counseling to qualify, nor will you pay monthly insurance premiums.
While borrowing with the equity of your home may free up cash for living expenses, the mortgage insurance premium and origination and service fees can accrue. If you buy those types of financial products, you could lose the money you get from your reverse mortgage. After all, a key advantage of this loan, designed for homeowners age 62 and older, is that it doesn't require the borrower to make monthly mortgage payments. However, all costs are usually included in the mortgage balance, so lenders don't have to pay them out of pocket.
Some reverse mortgage sellers may suggest ways to invest your reverse mortgage money, including pressuring you to buy other financial products, such as an annuity or long-term care insurance. They are evaluating your willingness and ability to meet your obligations and mortgage requirements. This is especially true if you act as if a reverse mortgage is a solution to all your problems, pushes you to apply for a loan, or have ideas about how you can spend your money on a reverse mortgage. Read on to learn more about how reverse mortgages work, how to qualify for a reverse mortgage, how to get the best deal for you, and how to report any fraud you may see.