subject: Why The Reverse Mortgage Loan Is Not Like A Subprime Loan [print this page] After the launch of the HECM reverse mortgage loan in 1989, these fears are not true. When the subprime loans were taken by the low income people, who have to pay them back every month, the reverse loans are always taken against the equity of the home and they do not include any monthly payments.
1. The Subprime Loan Requires Back Payment, But The Reverse Mortgage Does Not.
This is another big difference between these two loan types. The borrower of the subprime loan has to make the back payments monthly. But with the reverse loan a borrower can even increase his monthly income, because if he has a traditional mortgage loan left, he has to pay it away first.
So the difference is in the cash flow. The reverse loan borrower will pay everything back, when the loan will be closed, but the subprime borrower every month. If he cannot do the back payments, the lender can sell the home and to use the money to take his part. This will never happen with the reverse loan.
2. The Subprime Borrower Can, But The Reverse Loan Borrower Cannot Lose The Home.
The subprime borrower can lose the home, if he is unable to do the payments to the lender. So he must have cash money every month for this. But the reverse loan will use the equity of the home during the whole running time. This means, that the borrower will stay as an owner in every case.
3. The Subprime Guarantee Can Decrease Below The Needed Level, But The Reverse Loan Cannot.
If a borrower has taken the new loan and the sum is close to 100 percentage to the market value of the home and the market starts to decline, the guarantee value does not cover the needed level anymore, the lender can take the ownership and to sell the home.
The reverse loan sum can never climb to the full value of the home. Another reason is that the loan will be paid back, when the loan will be closed. This happens, when the last borrower will move away, will die or sell the home.
4. The Mortgage Insurance.
When a borrower will take the HECM reverse mortgage loan, he has to take a compulsory mortgage insurance. This is the law. If the selling price of the home will not cover all the costs of the loan, the missing part will be paid from the insurance. This means that a borrower can never lose more than the value of the home, nor his other assets will never be used to pay the mortgage loan.
