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What Is A Reverse Mortgage Loan And How Does It Work?

Feb 8

The most prevalent sort of reverse mortgage is a House Equity Conversion Mortgage (HECM), which is a specific type of home loan available exclusively to homeowners aged 62 and over.

A reverse mortgage, like a standard mortgage, allows homeowners to borrow money while securing the loan with their house as collateral. When you take out a reverse mortgage loan, the title to your property remains in your name, just as when you take out a standard mortgage. Borrowers do not make monthly mortgage payments with a reverse mortgage loan, unlike with a standard mortgage. When the borrower no longer resides in the house, the loan is repaid. Each month, interest and fees are added to the loan total, causing the sum to rise. Homeowners who take out a reverse mortgage must pay property taxes and homeowners insurance, live in the house as their primary residence, and keep it in excellent repair.

The amount owed to the lender by a homeowner with a reverse mortgage loan increases with time, not decreases. Because interest and fees are applied to the loan total each month, this is the case. Your home equity drops as your loan balance rises.

A reverse mortgage loan is not a kind of unrestricted credit. It's a loan with an increasing loan balance due to borrowed funds plus interest and fees each month. The homeowners or their heirs will have to repay the debt at some point, often by selling the house.


Keep An Eye Out For Reverse Mortgage Frauds

Scams With Contractors

Contractors that contact you about taking out a reverse mortgage loan to pay for house repairs should be avoided. It might be a ruse. Allowing yourself to be coerced into taking out a reverse mortgage loan is not a good idea.


Scams That Prey On Veterans

The Veterans Administration (VA) does not provide reverse mortgage loans. To entice elderly Americans anxious to stay in their homes, some mortgage commercials fraudulently promise veterans preferential prices, imply VA approval, or offer a "no-payment" reverse mortgage loan.


A Reverse Mortgage Has A Three-Day Cancellation Period

Most reverse loan options provide you three business days after the loan closes to terminate the agreement for any reason. This is known as your "rescission" right. You must tell the lender in writing if you wish to cancel. Send your letter certified mail with a return receipt so you can keep track of when you mailed and when the lender got your cancellation notice. Keep copies of any correspondence you have with your lender. If you cancel, the lender has 20 days to refund any money you spent for the reverse mortgage loan's financing. If you feel you have a valid cause to cancel the loan after the three-day deadline has passed, get legal advice to determine if you have the right to do so.

This information is solely applicable to Home Equity Conversion Mortgages (HECMs), the most frequent type of reverse mortgage loan.