Everything You Need to Know About Traditional Reverse Mortgages

A traditional reverse mortgage is a loan insured by the Federal Housing Administration (FHA) that allows seniors to access a portion of their home equity to obtain tax-free funds1 without having to make monthly mortgage payments.2 It is also known as a Home Equity Conversion Mortgage (HECM). This type of loan is similar to a traditional mortgage, but with a reverse mortgage loan, borrowers don't make monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. Interest and fees are added to the loan balance each month and the balance increases.

Homeowners must pay property taxes and property insurance, use the property as their primary residence, and keep their home in good condition. A reverse mortgage loan allows homeowners who are 62 or older and have significant capital to borrow against the value of their home and receive funds such as a lump sum, a fixed monthly payment, or a line of credit. Unlike a regular mortgage, where the borrower makes monthly payments to the lender, there are no monthly payments on a reverse mortgage. The landlord is also not required to sell his house.

Instead, the lender pays the borrower. That's why it's called a reverse mortgage; the roles of the borrower and the lender are essentially changed. The borrower draws money from the capital of the home, which the lender releases and pays. Single-purpose reverse mortgages are loans designed for a specific goal approved by the lender, such as paying property taxes or making improvements to your home.

In addition to the possibility of scams targeting older people, reverse mortgages have some legitimate risks. You only repay the loan once you die, sell the house, or move for at least 12 months. If you own a home, condominium, or townhome, or a prefabricated home built on or after June 15, 1976, then you may be eligible for a reverse mortgage. A Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, is a special type of mortgage loan only for homeowners over the age of 62. A reverse mortgage allows borrowers to convert part of their home equity into a lump sum of money, line of credit, or fixed monthly payment. You won't receive a reverse mortgage interest tax deduction until all or part of the balance has been paid.

A home appraisal is always required as part of the reverse mortgage process to obtain an unbiased opinion of the value of your home from a licensed real estate appraiser. You can also refinance a new reverse mortgage with better terms or a conventional loan, which you can use to pay off the balance of the reverse mortgage. That way, no unscrupulous lender or abusive scammer can take advantage of them, they'll be able to make the right decision even if they hire a shoddy reverse mortgage advisor, and the loan will have no unpleasant surprises.

Harry Lammel
Harry Lammel

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