One of the advantages of a non-recourse loan is the way interest payments start on a reverse mortgage. Homeowners save thousands and avoid payments.
Of course, reverse mortgages do accrue interest. The way interest accrues however is unique and may seem odd at first glance because payment is not required on a monthly basis. Each month, the new balance is carried forward and added to the balance owed.
Interest Accrual on a Reverse Mortgage
The amount of interest paid on a reverse mortgage is similar to conventional real estate loans. In addition, interest begins to accrue the day a loan is funded. In most situations, the proceeds of the loan pay off all preexisting real estate loans and establish an available line of credit. Homeowners may draw on a line of credit as needed. Commonly, take draws monthly to supplement retirement income. Payments can be established using automatic deposit options.
Repayment of Loans
Reverse mortgages do not require payments as long as one of the borrowers lives in the home and performs routine maintenance. When the last owner leaves permanently, the principal and interest accrued on the loan become due and payable. A great advantage of a reverse mortgage is that repayment is limited to the actual market value of a house used as collateral. In the event the real estate market drops, owners and potential heirs of the original owners may surrender possession in full payment. This type of loan is known as a non-recourse debt because it does not create personal liability.
Home Values
The value of a home in the opinion of a lender is somewhat irrelevant from the viewpoint of owners and heirs. If owners believe homes are worth more than amounts owed, loans can be paid anytime. If owners believe homes are worthless than owed, the owners have an absolute right to vacate and surrender homes without making payments.
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