How Reverse Mortgages Got Their Start and How They Work

You have probably heard a reverse mortgage is a great retirement home loan option unlike a standard loan. What you may not understand is the purpose of a reverse loan and how the concept actually works. To grasp the potential benefits of reverse loans for retirees, you must first delve into their origins. Here is a brief look at how reverse mortgages got their start and how they work.

The First Reverse Mortgage Ever Offered

Reverse mortgages got their start in the United States in 1961. The first one was issued in Maine. A woman concerned about the possibility of losing her home when her husbands income was no longer coming in went to a local lender to ask for help. That lender became the first reverse mortgage lender by developing a special type of loan to help her. Reverse loans have gone through several changes through then, including government regulation, but they still have their roots in that initial agreement.

The Evolution of the Reverse Mortgage Process

As reverse loan agreements became increasingly popular, the United States Department of Housing and Urban Development (HUD) started developing its own version of a reverse mortgage. Today, it is known as a Home Equity Conversion Mortgage (HECM). An HECM is just like a reverse mortgage in most ways, except it is government-insured and typically issued by a government agency like HUD or the FHA. A loan from a private reverse mortgage lender is still controlled by some government regulations but is not government-issued.

The Reason it is Called a Reverse Mortgage

If you are wondering why a reverse mortgage is referred to as “reverse,” it is because you get ongoing money from the lender according to the terms of the loan, at least until the total available home equity is borrowed. To figure out how much you can borrow, a reverse mortgage calculator is used. By using the reverse mortgage calculator tool, you and your lender can use specific information to figure out exactly how much money is available to borrow from your home equity.

A standard mortgage requires you to repay money to your lender regularly, instead. That can cause extra financial problems when you are on a fixed retirement income. The reason a reverse loan has no such requirements is it is designed to be a long-lasting loan that provides financial assistance throughout your retirement. As long as you stay in the home, you do not have to repay all of what you borrowed at any particular time.

When You Have to Pay Back a Reverse Mortgage

You have to pay back a reverse mortgage if you cease to meet the terms of the loan at any time. For example, you are required to continue paying the costs associated with owning the home. Failure to pay such expenses, including taxes, or filing for bankruptcy may cause you to default on your loan. Another way you can default is by moving off the property before the loan is paid back. In any such situation your options are to pay back the remaining loan balance or agree to the sale of the property.

Reverse Mortgage Spending Restrictions to Considering

Reverse mortgages have very few spending restrictions attached to them. You can use the money to fund vacations, retirement hobbies, or family needs of any sort. Paying medical bills or monthly utilities are also good uses for the funds. The major restrictions on how you can spend the money are any closing costs are taken out of what you receive ahead of time and you cannot maintain any other home loan while you have a reverse mortgage. Therefore, if you already have a traditional mortgage, you must use the funds you receive to pay it in full before you can be free to spend remaining funds for the purposes you desire.
















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