The reverse mortgage is a relatively recent mortgage loan program that provides a different twist to the typical refinance loan.
The big twists is that the borrower does NOT make any monthly payments to the lender. Instead, the lender usually provides monthly payments to the borrower. However, the borrower often has an option to receive the cash-out in one lump sum.
The reverse mortgage is an increasingly attractive loan program for senior citizens who have plenty of equity in their property. This allows those senior citizens to use the investment they have made in their home to help them with their daily expenses in their later years.
Through a reverse mortgage, the increased value of the home may be used without the owner being forced to sell the property.
Unlike standard mortgage loans, the reverse mortgage is built on negative amortization. The interest charges that the borrower would normally pay is instead added to the principal amount. The loan basically requires only one payment—the final one when the property is sold or the loan refinanced.
In 1989, HUD introduced an experimental reverse mortgage program, and both Fannie Mae and Freddie Mac both agreed to purchase them for their own portfolio investments. Several different repayment plans are offered, including the sale of the house at the time of the borrower's death.
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