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How Do Reverse Mortgages Compare to Conventional Mortgages?
A Reverse Mortgage is similar to a conventional mortgage because it
is a lien against the property and the title remains in the name of the
borrower. As with the conventional mortgage, the borrower is
responsible for maintaining the property and paying the property taxes
and insurance and association dues if applicable.
The costs are also similar to the conventional loan including an
appraisal, title insurance, settlement fees, origination fee, and
recording fees. Additional costs with the HUD Home Equity Conversion
Mortgage (HECM) reverse mortgage are the FHA Mortgage Insurance Premium
(MIP) and a monthly service fee. Note that on a conventional loan the
servicing fee is included in the interest rate, whereas it is a
separate fee with the reverse mortgage. If one is doing a "forward"
FHA loan, they too will have the FHA Mortgage Insurance Premium.
To determine the loan amount on a conventional loan, the lender
looks at the home value, credit worthiness, income, assets, and other
potential risks that may be associated with loan repayment. The
reverse mortgage is different because there are no income or credit
score qualifications. The age of the borrower(s), the home value, and
the expected interest rate are used for determining the loan amount.
With the conventional mortgage one receives a lump sum and has to
make monthly payments. With the reverse mortgage one receive cash
without making monthly or immediate repayment. Funds can be received
in a lump sum, monthly payments, line of credit, or a combination of
A loan term or when the loan is to be paid in full with a
conventional mortgage is usually set, i.e. 15 or 30 years. A reverse
mortgage is to be paid in full when the loan is no longer the primary
residence of the borrower(s) or on the 150th birthday of the youngest
As with a conventional mortgage, when the loan is due and payable,
the house does not become the property of the lender. The borrower or
estate handles the repayment of the loan. When the home is sold with
either mortgage the loan is paid off and the remaining equity is the
borrower's or their heirs.
The reverse mortgage is a non-recourse loan which means the loan is
paid back based on the fair market value (generally from the sale of
the home) with no personal liability to the borrower or the estate as
long as they are not retaining ownership.
For seniors 62 and older, the reverse mortgage is generally more advantageous than a conventional loan.
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