A reverse mortgage protects borrowers when confronting financial emergencies and helps pay regular monthly living expenses. Protection is long-term.
A reverse mortgage adds a degree of protection for homeowners in two ways. These types of loans frequently enable a higher quality of life and provide an established line of credit as a safety net to pay for emergency expenses. Homeowners may use funds for either purpose without prior approval.
Government Guaranteed Reverse Mortgage Loans
The U.S. Department of Housing and Urban Development backs a particular type of reverse mortgage known as a Home Equity Conversion Mortgage (“HECM”). These loans are backed by a government guarantee. In most situations, a HECM loan allows each borrower to establish a line of credit to provide regular monthly payments to a borrower. Alternatively, borrowers may choose to draw on a line of credit on an as needed basis. According to the Federal Trade Commission, HECM loans typically cost less over the life of a loan compared to other types of non-guaranteed loan products that lenders may offer.
A Double Benefit for Protection
The protections provided to borrowers by utilizing a reverse mortgage are twofold. First, borrowers no longer make regular monthly home payments to a lender. Second, borrowers may further increase monthly cash flow by electing to receive regular payments from a lender. In the second instance, these payments are available up to the limit of a line of credit established when a borrower applies for a loan. The combined effect of these two advantageous is often a dramatic increase in available funds during retirement. Funds may be used for any purpose.
Loan Costs
Drawing against a reverse mortgage line of credit increase the principal balance owed. Each month, interest accrues on the new principal balance. In addition, all previously accumulated interest is also rolled into the balance and treated as principal. Over time, the amount of interest paid each month continues to grow.
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