Closing costs can be paid out of the loan proceeds. This means a borrower incurs very little out-of-pocket expense to get a reverse mortgage. The only out-of-pocket expenses you may incur are for counseling and the appraisal, which together add up to a few hundred dollars. The loan balance is comprised of the amount borrowed, plus fees and interest. The loan balance grows as the borrower continues to live in the home. In other words, when the borrower sells or leaves the house, he or she will owe more than originally borrowed.
Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time a payment is made. A reverse mortgage is an empty balloon that grows larger as time passes.
When the loan is due, the estate will repay the cash they received from the reverse mortgage, plus interest and any other fees, to the lender. The remaining equity in the home, if any, belongs to the borrower or to their heirs.
The more you borrow and the longer you stay in the loan, the less equity your estate can typically expect to receive.
Factors that determine future equity include; future interest rate (+/-), home appreciation (+/-), consumer spending, longevity in the loan.
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The FHA reverse mortgage loan exists to help homeowners stay in their home. However, the homeowner must reside in the home as their primary residence, pay property taxes and homeowners insurance, and maintain the home. Failure to do so may require the servicer to initiate foreclosure proceedings, per HUD guidelines.
A HECM loan must be repaid in full when the last remaining borrower permanently vacates the residence. The loan also becomes due and payable if:
Borrowers did not pay property taxes or hazard insurance or violate other obligations.
Borrowers permanently move to a new principal residence.
The last borrower fails to live in the home for 12 months in a row (for example, the borrower has a 12-month or longer stay in a nursing home).
The borrowers allow the property to deteriorate and do not make necessary repairs.
While the typical retiree uses a reverse mortgage to eliminate debts, pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their needs.
The advantage of using what is known as a HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the reverse mortgage proceeds. This home buying process leaves the homeowner with no monthly mortgage payments.