Reverse mortgage is a home loan designed to benefit older homeowners. A reverse mortgage loan does not consist of monthly payments on mortgage. However, the borrower will still be the responsible party in covering any property taxes due and/or homeowner’s insurance coverage. What reverse mortgage does is allow the older homeowner to access any equity that has been accumulating in the home, as well as to let them have the payment on the loan deferred up until they either sell the home, move out of the home, or they pass away. Since a reverse mortgage does not consist of making monthly payments on the mortgage, all interest will be added monthly to the loan balance. Eventually, the loan balance can growth to exceed the home’s value, especially during the occasional decline in home values and/or should the borrower have a long life expectancy, living in the home for many years to come. In fact, the borrower or the estate of the borrower isn’t usually required to repay more than the home’s value, which means they would not have to pay for any additional loan balances in the excess of the value of the home.
The transactions of a reverse mortgage have specific rules which can vary a great deal, depending on the jurisdiction laws. For instance, a loan balance must not exceed the home laws of the fair market value. Several economists have argued, saying that the reverse mortgage loans can benefit the elderly homeowners over a period of time by smoothing out the income they bring in, and their patterns of consumption. Furthermore, it has been argued by the Consumer Financial Protection Bureau (the regulatory authorities), on reverse mortgages being “Complex products which are hard to understand,” especially because of all the “Misleading advertising”, the lower quality of counseling, and “The risk of scams and fraud.” For instance, in Canada, it is required for a borrower to have independent legal advice on reverse mortgage, or they will not be approved.
The National Consumer Credit Protection Act which was amended in the year of 2012, and under the responsibilities of the Lending Laws, states that the regulation on reverse mortgage has to incorporate higher levels on the regulations of reverse mortgage themselves. The requirements to be eligible can vary from lender to lender. Keep in mind, when thinking about getting a reverse mortgage loan what you want is to get a loan that has no monthly charges, with the lowest interest rates. If the bank you go through is charging monthly fees, change banks.
Money that comes from a reverse mortgage may be distributed in one of several ways:
- It can be in a line of credit, such as the home equity line of credit.
- It can be in a lump sum, as a settlement, or cash.
- It can be as an annuity, where you get a cash payment regularly.
- It can be a combination of all of the above.