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We recently began researching reverse mortgage because my father may qualify next year and we’d like his transition to retirement to be as smooth as possible. We are still exploring this option because we want to understand everything before making such an important decision. If your family is in a similar situation, I hope this post helps. – Mina
Retirement can be a time of stress or relaxation. You might not feel like that choice is up to you, especially when money is tight, but it is. At least, it can be when you own your own home. That is because your house may have a cash value you can borrow against. You might be opposed to a traditional mortgage for many reasons, but you can qualify for a special option called a reverse mortgage, if you are 62 or older. Let’s get to the bottom of reverse mortgage lingo you need to know before you consider such a loan.
What it Means for a Loan to be Reversed
The first thing you need to know about reverse loan lingo is what it means for it to be reversed. To put it simply, it means the loan pays money to you, rather than you having a loan bill to pay. At least, that is how it works in the beginning. The reverse mortgage, unlike a traditional home loan, lets you borrow money unhindered for years.
What a Reverse Loan’s Loan Period Is
If you know anything at all about traditional mortgages, you are probably aware they have loan periods. The loan period is simply how long each loan lasts. Such loan agreements expire on established dates. Failure to pay what you owe by an established date on a traditional loan agreement could result in eviction from your home, among other consequences.
There is no clear cut loan duration when you sign up for a reverse mortgage, which has good and bad points. On the positive side, you could remain in your home for a decade or more with no repayment obligation to deal with. On the negative side, the lengthier loan means more interest to pay. If you ever leave your home, the balance can also be quickly called in.
Why You Have to be Careful About “Equity”
The term “equity” in the reverse mortgage world loosely refers to home value. However, the total value of your home is not the amount you can borrow. Only a portion of the funds is free for such a transaction. The available portion could also be reduced if equity is otherwise spoken for, such as when a traditional loan is already active for your property.
Reverse Mortgages and Ways to Default
Defaulting is failing to meet the terms of a loan. Whenever defaulting occurs, a lending institution like a bank has the right to terminate the agreement and take the actions associated with that termination. In the case of a traditional mortgage, those actions can evolve evicting you from your home. Your other assets may also be in jeopardy.
A reverse mortgage offers several types of protection from that sort of default. For example, your other assets cannot be touched when you fail to pay the balance. Also, since one rule of the reverse loan is you have to stay in the home, there is not the same eviction danger. However, the balance can be called in if you admit going bankrupt or otherwise fail in your obligations of homeownership.
When defaulting on your reverse mortgage does occur, you are given a choice. You can pay what you owe or the home can be sold. Typically, you have a few months to make that choice and make the necessary arrangements. Although, the rules set by each lending institution vary. That is why you should always go over those circumstances with your lender before signing a contract.
Finding Out What Else You Need to Know
Although simple at face value, there are a lot of particulars to know about reverse mortgages. Speak to your lender until you are quite clear about all of them, including interest rates and fees. It is also good to speak to an unrelated reverse mortgage specialist who can provide you with unbiased assistance. That way you can guarantee you have all the information you need.