Why It Is Safer To Make Use Of An HECM Reverse Mortgage?

As more Americans live longer, reverse mortgages have become one of the most effective financial tools for elderly. Unlike traditional mortgage where borrowers are obligated to pay their lenders, in reverse mortgage, borrowers receives cash from the lender and are not obligated to pay it. Reverse mortgage are divided into three types - (1) Single purpose (2) HECM and (3) Proprietary. The most popular though is the HECM, which is a program, implemented by the Department of Housing and Urban Development. 

To be eligible for the loans, the borrower should be of 62 years old and above. The property that would also serve as collateral for the mortgage should also be under the name of the borrower and his primary resident. Borrowers should also have a clean record. They must not be delinquent and do not owe any debts to the government. The borrower is required to undergo the HECM counselling given by the Department.  The counselling program would cover out the financial ramifications, repayment conditions and obligations that the borrower would face once loan is granted. The counselling also covers the cost of the loan including fees such as (a) loan origination fee, (b) inspection or appraisal fee, (c) insurance premiums, (d) servicing and (e) interest.

Once the loan is approved, the cash is disbursed. The amount of the loan depends on the loan amount. Disbursement of the cash depends on the time that the borrower defined in the contract. Final disbursement will be given at the end of the loan period.  Borrowers are required by the loan contract to live in the house that was used as collateral. The borrower is required to pay all property and insurance tax of the property as well as to ensure proper care and maintenance to preserve the value of the property.

The borrower can still live in the mortgage property and retain the title as long as he/she is not in default of the contract. Although HECM has its pros, there are some cons as well including (a) the amount that will received by the borrower is lower than the amount in the loan contract. This is because the fees of the loan are added to the loan contract, reversed mortgage is advantageous to the borrower but also has its disadvantages including: (a) lower actual cash out. This is due to the cost of the loan, which is added by the company to the loan so the borrower does not have to cash out, (b) higher loan fee if the borrower failed to pay the taxes, (c) selling the house would make the loan agreement effective immediately and (moving to a new home forfeits the agreement.

For those interested to learn more about the actual estimate or cost of their loan, they can check out a reverse mortgage calculator. One would only indicate their zip code, birthday, value of the property and other details that one might require. These calculators would help you known how much you can loan though actual amount would still vary depending on the rates and program that the department has.

For related readings, checkout the disadvantages of reverse mortgage page.