Additional Resources

  1. Reverse Mortgage Loans: A Quantitative Analysis [albany.edu]
  2. Reversing The Trend: The Recent Expansion Of The Reverse Mortgage ... [citeseerx.ist.psu.edu]
  3. Reverse Mortgages: A Closer Look At Hecm Loans [citeseerx.ist.psu.edu]
  4. Hacking Reverse Mortgages [cfpweb.mit.edu]
  5. The Costs, The Benefits, And The Risks [bogan.dyson.cornell.edu]
  6. Andrew Caplin June 1 2000 [econ.nyu.edu]

Definition

A reverse mortgage or home equity conversion mortgage is a special type of home loan for older homeowners that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner's insurance. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower is generally not required to repay any additional loan balance in excess of the value of the home.

Reverse Mortgage

Reverse Mortgage is a type of loan which old homeowners can apply for after which they can borrow money against their home’s value, without having to pay any monthly mortgage payments. Unlike traditional loans, where the borrower has to use his income to pay off monthly mortgage payments, in reverse mortgages the borrower can actually save up his loan balance overtime because he is free from making any monthly payments, whatsoever.

How do they work?

Also known as Home Equity Conversion Mortgage (HECM), these types of loans are only available to people over 62 years of age. They work differently than other loans in this way that while in other traditional loans where the borrower has to pay money to the lender, here the lender pays money to the borrower. The money that he pays the borrower is based on a percentage of the borrower’s home’s value.

The borrower has a number of options available through which he can take this money from the lender; if he likes she/he can have all the money in one single lump sum, or she/he can have it in payments made to him on a monthly basis. Moreover, the borrower can also decide the amount of money to be paid to him in these monthly payments.

Until the reverse mortgage lasts, the borrower gets to keep the title of their home which serves as the loan’s security. He is charged interest only on the proceeds that he receives. Eventually, as the loan progresses, the borrower’s debt increases, while his home equity decreases. In situations where the borrower dies (one of the reasons why reverse mortgages are only lent to 62 year olds only is because of the life expectancy concept), or he decides to sell or move out of his home, the lender is then free to sell the home to make up for the money he had been paying the borrower the whole time.

What happens if you outlive the loan?

In cases where the borrower is still alive or has not moved out of his house and is still receiving payments from the lender, this means that he has outlived the loan because he is now receiving money which is actually more than the worth of his house.

If someone who has taken a reverse mortgage and outlives it, according to the Federal Trade Commission he is still only to pay the amount of money to the lender which is in proportion to the value of his house.

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