Reverse mortgage strengths and weaknesses
Reverse mortgages are a common means of income that seniors need to survive the Home Equity Conversion Mortgage (HECM) program. Reverse mortgages are losing popularity but are still a very useful program introduced by the FHA (Federal Housing Administration) United States in 1965. The HECM program allows elderly Americans to survive into their final years with enough money to take care of themselves in terms of medicines, groceries, paying utility bills, settling taxes and other fees, etc. The HECM program asks you to let your home be foreclosed on by the FHA, banks, or other FHA-approved lenders if the owner dies, sells the house, or moves out permanently and is unable to repay the loan. The heirs of such seniors who opt for the HECM program get their elder’s house back if they can repay the loan with all interest and other charges. So the question is; Is the HECM program a good option?
Difference between mortgages and reverse mortgages
We are mostly familiar with the term mortgage, which is a way of obtaining money against some property (both movable and immovable) from a lender. The borrowed money received from the mortgaged property is paid back in monthly installments along with interest to the lenders who are mostly bankers or some finance companies. While a reverse mortgage is the income for senior citizens equal to the equity of their home. In the case of reverse mortgages, the lenders are the finance companies and banks approved by the FHA. The amount is paid to the borrower in one go, in monthly installments or online on credit and keeps his home for his entire life.
Who is eligible for reverse mortgages?
Anyone 62 and older is eligible, provided the borrower owns the house.
Terms of credit limits of reverse mortgages
The loan limit admissible to the borrower under this scheme depends on the age of the borrower and the condition of the house itself. Borrowing terms for reverse mortgages also depend on the current interest rate, the area’s FHA mortgage value and the original mortgage insurance premium (MIP); with two options viz. 2% Standard HECM Option or 0.01% HECM Savings Option.
Analysis of reverse mortgages through the HECM program
- Payments can be arranged according to the wishes of the borrower, i.e. lump sum, online credit or monthly installments.
- The homeowner or borrower does not make any monthly payments.
- Monthly payments are due from the homeowner when he or she dies, moves out permanently, the home is in disrepair, or the homeowner is absent for a continuous 12 months. Also if the owner is selling the house. In all these cases, the loan is due in full with interest and fees.
- Regardless of the interest rate and monthly payments, the owner, borrower or heirs will not pay more than the actual cost of the home.
- The homeowner will continue to receive the monthly payments if he or she lives for a period that exceeds the actual cost of the house, provided the homeowner uses the house as a primary residence.
- It does not require any credit scores or income to qualify for this loan.
- The loan is not taxable.
- Under HUD-approved mortgage terms, the homeowner cannot be forced to vacate or vacate the home.
- The rest of the online loan gets the same rate as the reverse mortgage itself.
- Homeowners dependent on Medicaid or other state or federal programs should consider eligibility for this loan.
- This program is quite expensive to close. The origination fee is double ($5,000 to $8,000) that of other conventional mortgages and mortgage insurance. However, interest rates are adjustable.
- As with complex loans and as a consumer protection measure, the homeowner or senior is required to see an independent HUD (United States Department of Housing and Urban Development) counselor.
- Borrowers continue to pay real estate taxes, home repairs, insurance with the added burden of paying for mortgage insurance. In case of failure, the borrower may be asked to repay the loan earlier.
- Cost of living is not adjusted for inflation to protect the borrower.
- The loan given in the form of monthly installment is added to the loan and finally compound interest is given.
- The interest falls on the heir or the state when it must be returned.
Mortgages and reverse mortgages are associated with poor financial planning. However, reverse mortgages are for seniors or senior citizens who are unable to support themselves. Because many of the authors, analysts and critics are of the opinion that the reverse mortgage option should be the last measure to be chosen. Senior citizens are forced to accept this option by compulsion as they have no other choice. Thus, seeing the strengths and weaknesses of the program, it is up to the reader to decide whether a reverse mortgage is a good option or not.
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