Mortgage loans have become quite popular, and a lot of people take these loans to finance the purchase of their dream home. But there some differences between mortgage loans and reverse mortgage loans.
Mortgage Loans are given by the financial institutions to help you with the purchase of the house. You get approximately 80% of the value of the home or less. The house that you buy acts as collateral for the money that you are borrowing from the lender. It is usually paid as a monthly instalment failing which the lender can seize your house. In contrast, in a reverse mortgage, the scenario is reversed, and the lender usually pays the money to the borrower. This is equity in their homes that they can use as cash post-retirement. In the case of the reverse mortgage, there is no need for the borrower to pay the loan back until and unless the house is sold or vacated.
Federal Insurance Protections:
A reverse mortgage offers several protections which is not the case for a traditional mortgage loan. The reverse mortgage insurance safeguards the borrower as they are non-recourse loans. So the lender cannot access any assets except for the house, and this also makes sure that there is no personal liability on the borrower. It ensures that borrowers do not owe anything more than the value of the house. However, the mortgage loan does not have any additional safeguards as those are recourse loans which mean they are personally liable for it. There is no protection, even if the balance of the loan is more or higher than the value of the house.
Line of Credit Growth:
The reverse mortgage line of credit grows with time which means that there will also be a growth in the value of funds irrespective of the condition of the housing market. This line of credit growth makes more funds available to the borrower with time as it grows at a similar rate at which the borrower pays the used credit. But this is not the case with mortgage loans as the line of credit does not grow. It stays the same, as signed by the borrower originally.
In case of the reverse mortgage loans, the borrower does not have to make any monthly payments to the lender. He can pay whenever and however he wants to. Reverse mortgage loans also allow the lender to spend as little or as much as he can and wants to. But it is the opposite for the mortgage loans, the monthly payments are crucial, and the borrower cannot default that. If the borrower cannot make the monthly payment, the house can be seized by the lender as it is the collateral. For the people who have retired and are senior homeowners, the deferring repayment is beneficial as they can control and keep their finances in check when there is no fixed monthly cost involved. They can use this amount for their daily expenses and meet their basic needs. However, it becomes essential to pay this loan amount only if the owner passes away, moves somewhere else, defaults under the terms or sells the house.
If it is obvious from the documentation that the borrower cannot repay the loan amount, the results are different for both reverse mortgage and traditional mortgage loans. For reverse mortgage loans, the borrower is asked to keep a part of the fund aside to meet these obligations and is not denied the loan. But in case of the mortgage loans, the borrower is denied the loan.
Therefore, the differences mentioned above should be referred to when deciding on taking a mortgage loan.