What is a Reverse Mortgage?

A Home Equity Conversion Mortgage (HECM), the most prevalent sort of reverse mortgage, is a unique type of home loan available only to homeowners age 62 and older.

As with a traditional mortgage, a reverse mortgage enables homeowners to borrow money using their home as collateral. Similarly to a conventional mortgage, when you obtain a reverse mortgage loan, you retain ownership of your home. In contrast to a conventional mortgage, borrowers do not make monthly mortgage payments with a reverse mortgage loan. When the borrower vacates the premises, the loan is repaid. Each month, interest and fees are added to the loan balance, growing it. With a reverse mortgage loan, homeowners are obligated to pay property taxes and homeowners insurance, as well as maintain the property as their primary residence.

The homeowner’s debt to the lender increases–not decreases–over time with a reverse mortgage loan. This is because the loan sum is increased each month by interest and fees. Your home equity drops as the balance of your loan increases.

A reverse mortgage loan is not a source of unrestricted funds. It is a type of loan in which borrowed funds plus interest and fees equal an increasing loan balance each month. The homeowners or their heirs will eventually be required to repay the loan, which is typically accomplished through the sale of the home.
Scams involving reverse mortgages should be avoided.
Scams against contractors

Contractors approaching you about obtaining a reverse mortgage loan to cover the cost of home repairs should be avoided. Perhaps this is a hoax. Avoid being coerced into obtaining a reverse mortgage loan.
Scams directed against veterans.

The Veterans Administration (VA) does not offer reverse mortgage loans. Certain mortgage advertisements falsely promise veterans exceptional prices, imply VA approval, or advertise a “no-payment” reverse mortgage loan in order to entice older Americans anxious to remain in their homes.
You have a three-day cooling-off period on reverse mortgages.

With the majority of reverse mortgages, you have three business days after loan closure to cancel the transaction without incurring any penalties. This is referred to as the “revocation” right. Cancellation must be made in writing to the lender. Send your letter certified mail and get a return receipt to establish the date you sent and the date the lender received your cancellation notice. Ensure that you retain copies of all conversations with your lender. Following your cancellation, the lender has twenty days to refund any money you spent for the reverse mortgage loan’s financing. If you believe you have a reason to cancel the loan after the three-day deadline has expired, seek legal advice to determine whether you have the right to do so.

This material is for Home Equity Conversion Mortgages (HECMs), the most frequent type of reverse mortgage loan.

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