A homeowner over the age of 62 may think that it is a good idea to take out a reverse mortgage. The federal backing of many of these loans and the government oversight makes this type of loan less risky than other home equity loans, but it does not mean there are no risks associated with the process.
Why Reverse Mortgages are Safer
An FHA-backed reverse mortgage ensures that a person can never owe more than the value that his home sells for. However, home equity conversion loans without this backing may require that a person who does not have this type of insurance pay some of the value of his home if the sale value of the property is less than the remaining value of the mortgage.
If a person is forced to leave his affairs through no fault of his own, such as being put in a nursing home it means that the person who has power of attorney must pay the remaining balance. If a person left a will, it means that his heirs must pay off the balance of the loan.
Are There Other Risks on Taking Out a Reverse Mortgage?
There are few other risks associated with taking out a reverse mortgage, unless the borrower does not understand the terms. The loan falls due when the original home owner changes address for any reason. If a home owner simply wants to move out into a cheaper apartment, he may decide to pay back the loan rather than sell it. The bank does expect to get its money back.
The current economic conditions have caused reverse mortgages do go into default. FHA insurance helps the lender recover some of its loss, but the borrower is usually the one who pays the premiums on this type of policy.
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