If you need extra retirement money then a reverse mortgage may be able to help you relieve some of your financial stress. Also known as a home equity conversion mortgage, it is a type of loan that can turn some of your home equity into ready cash. Unlike a standard lending agreement, you will not be obligated to repay small amounts on a monthly basis. In fact, your lender may pay you monthly. Though you can also request a single large payment if you choose.
Reverse Loan Eligibility Standards
You must think about both the advantages and disadvantages before entering into such a contract with a lender. For example, a major reverse loan disadvantage is that you cannot even apply for one unless you are at least 62 years of age. Another issues is that you cannot already have any other type of mortgage unless you can pay the balance of that mortgage in full when the new mortgage agreement is made official. You also need to understand that you will still own your home and be expected to keep up with all the responsibilities of home ownership, such as insurance payments, tax payments, and home maintenance costs.
When HECM Balances Must be Paid Back
An HECM does not have the same due date and default rules as a standard loan agreement. Your reverse mortgage lender will allow you to borrow the money for the length of time that you personally retain ownership of your home. However, the longer you take to pay off your debt, the more interest you will have to pay on the money that you borrowed.
If you choose to personally vacate your home, even if your children or other relations are staying there, the full balance of the reverse loan will come due. The same is true if you vacate your home involuntarily for an extended or permanent length of time for reasons such as death, moving into an assisted living facility, or being hospitalized indefinitely.
What Happens if You Pass Away?
If you have a spouse whose name was on the loan agreement with yours and you pass away then your spouse will be able to maintain ownership of the property and responsibility for the loan debt. But one of the reverse mortgage disadvantages is that, if you were the only one to sign the agreement with the lender, your legal heirs will be forced to make a choice when you pass away. Option one is that your heirs can pay your loan balance and keep your house. The second option is that your heirs can allow your lender to sell your home. If they choose option two then they will not be libel for remaining debt if the sale price is lower than the loan balance. If the sale price is higher than the balance then your heirs will receive the difference.
Are There Rules About Paying Back These Loans Early?
Among the many reverse mortgage pros and cons, there used to be penalties for early loan repayments. In 2012 a law was passed making it illegal for lenders to charge such fees. However, some lenders still charge exorbitant processing and administration fees, which you should inquire about ahead of time or at least be aware of.
The Reverse Mortgage Counseling Law
If you are considering applying for an HECM then you should also know that you are required by law to talk to a reverse mortgage counselor first and obtain a Counseling Certificate certifying that you did so. That law was put into place to ensure that anyone entering into a mortgage of the reverse sort fully understands the terms before signing a contract. Both phone and in-person specialty mortgage counselors are available.