Let’s begin with understanding that there are no institutions lending money in a reliable and predictable manner for free. When money is borrowed, it must be paid back, and some amount of interest will be due. For the borrower, what matters is how much interest, when payments are required, and at what point the entire debt must be repaid. The more flexibility there is in the structure, the greater freedom and security for the borrower. Little wonder an unstructured loan can be attractive.
No Required Payments
A Home Equity Conversion Mortgage (HECM) reverse mortgage, as a line of credit, secured against one’s primary residence, is an unstructured loan. No payments, even for interest, are required and there are no pre-payment penalties. If the borrower elects not to make an interest payment, the interest each month is rolled into the loan. The debt is not due until the house is sold or the last borrower moves, dies or turns 150 years old. That is as unstructured a loan as anyone can expect to get.
Protection for your Heirs
You can borrow as you desire from the available funds, pay back what you want when you want, or leave the debt to be resolved after your death. FHA insures that your heirs will never have to make up any shortfall if, (in extremely rare instances), the amount owed exceeds the sale price of the property after the last borrower moves, dies or turns 150 years old.
You are in Control
When payments are made, they go into the line of credit and that increases the available funds, which can be borrowed from again. Since the borrower controls when and how much interest is paid, it becomes possible to coordinate these payments for the greatest advantage against tax obligations.
Benefits of an Unstructured Loan
Structured loans are almost always “full recourse”. If a house secures the loan, both the property and the borrower can be pursued in a default. That means if the home’s value isn’t sufficient to pay the debt plus the cost of recovering the debt, the remainder is still owed by the borrower.
The unstructured HECM offers a tremendous advantage. Because it is insured by the federal government through the Federal Housing Administration, both the lender and the borrower have security. If the debt exceeds the fair market value for the home at the time of sale, the insurance pays the difference. The borrower (or their heirs) can’t be “underwater” with a Home Equity Conversion Mortgage. No one can owe more than the house sells for. It is a “non-recourse” loan.
Peace of Mind for the Future
The FHA insurance also protects the credit line, assuring the money will be there even if the lender goes out of business, the home goes down in value, or the borrower has unrelated credit problems. A HECM credit line is as secure as money in the bank. The bank can not close or reduce this line of credit. Only you, the borrower, can close it.
Incredibly, with a HECM, the available credit line also grows, compounding monthly based on the cost of borrowing (at the same adjustable rate as is charged on the debt). This cost-of-living adjuster rewards prudence and long-term planning.
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