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What Are Reverse Mortgage Loans And How Do They Operate?

Jul 13

A House Equity Conversion Mortgage (HECM), a specialized kind of house loan only accessible to homeowners aged 62 and over, is the most popular kind of reverse mortgage.

Similar to a conventional mortgage, a reverse mortgage enables homeowners to borrow money while using their property as collateral to secure the transaction. Similar to when you take out a regular mortgage, when you take out a reverse mortgage loan, the title to your home stays in your name. Unlike with a regular mortgage, borrowers of reverse mortgage loans do not have to make monthly mortgage payments. Loan repayment begins once the borrower vacates the property. The loan balance rises each month as a result of fees and interest being charged. Reverse mortgage borrowers are required to maintain their homes in top condition, pay all required homeowner's insurance and property taxes, and live there as their principal residence.

A homeowner with a reverse mortgage loan owes more money to the lender over time—it doesn't get less. This is true because monthly payments of interest and fees are added to the loan balance. As the sum of your loan increases, your home equity decreases.

Not all loans have limitless credit, including reverse mortgage loans. Due to monthly borrowings, interest, and fees, the loan debt is growing. At some time, the loan will need to be settled, usually by the sale of the home, by the original owners or their heirs.


Contracting Scams

Avoid contractors that want you to take out a reverse mortgage loan to pay for home repairs. Perhaps it's a ploy. It's not a good idea to allow pressure to force you to get a reverse mortgage loan.


Veterans Are Victims Of Scams

There are no reverse mortgage loans offered by the Veterans Administration (VA). Some mortgage advertising deceptively guarantee veterans favorable rates, imply VA approval, or offer a "no-payment" reverse mortgage loan to tempt elderly Americans eager to remain in their homes.


A three-day cancellation period applies to reverse mortgages

You have three business days to cancel the arrangement once the loan closes in the majority of reverse loan alternatives. The term "rescission" refers to this option. In order to cancel, you must inform the lender in writing. Sending your letter certified mail with a return receipt will allow you to keep track of when you sent and when the lender received your notice of cancellation. Any communication you have with your lender should be kept in writing. Any funds you spend on the financing of the reverse mortgage loan must be returned by the lender within 20 days of your cancellation. Get legal counsel to assess your legal options if you believe you have a good reason to cancel the loan after the three-day window has elapsed.

Since HECMs are the most common kind of reverse mortgage loan, this information only applies to HECMs.