Is a reverse mortgage a loan?

Is a reverse mortgage a loan? Read here for how a reverse mortgage is similar to all other loans!

A popular finance product used by many retired individuals are reverse mortgages. Since reverse mortgage borrowers do not have to repay any debt on a monthly basis, many people do not think they are loans. However, reverse mortgages are loans and have many characteristics that traditional loans have.

Interest Accumulates

The first characteristic that makes a reverse mortgage a loan is that it accumulates interest. While a reverse mortgage does not require monthly repayment, it still accumulates interest over time. Since the reverse mortgage principal balance is not paid down, the accumulated interest causes the principal balance to grow exponentially over time. This is unlike other loans which are paid down slightly with each loan payment.

Must Be Repaid

The next characteristic that makes a reverse mortgage a loan is that it must be repaid. All loans given by a lender are required to be repaid at some point. While a reverse mortgage does not have to be repaid for a long time, it eventually will need to be repaid either by the borrower’s heirs or through proceeds of the home’s sale. If the proceeds from sale do not cover the loan balance, the loan may go into default.

Come With Risks to Lender

The third characteristic that makes a reverse mortgage a loan is that they come with risks to a lender. Whenever they give out a new loan, a lender takes on a certain amount of risk. A reverse mortgage is no different in this way because a reverse mortgage lender risks that the home will not be able to be sold upon the death of the borrower. If the home is not sold, then the lender risks that the loan may not be repaid.

Related posts:

1. What If My Financial Needs Change During My Reverse Mortgage Loan?
2. How Can A Reverse Mortgage Loan Calculator Help Me?
3. Why Does A Reverse Mortgage Counselor Deter Me From Getting The Loan?
4. How Can a Senior Get a Reverse Mortgage Loan With Bad Credit?
5. How Is A Reverse Mortgage Like A Home Equity Loan?

This entry was posted on Sunday, March 7th, 2010 at 6:25 pm and is filed under reverse mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.