While you may have never heard the term “forward mortgage,” odds are you are actually quite familiar with it. Used mainly in comparison with reverse mortgages, the term refers to traditional mortgage loans that millions of Americans leverage each year to finance their home purchases. And thanks to the popularity and widespread use of these loans, their typical requirements are well-known, with many homeowners comfortable doing them.
Now, let’s talk about reverse mortgages. Far less common than their traditional “forward” mortgage counterparts, their requirements and specialized features are not yet fully understood by consumers, or even the media. As such, there have been several misconceptions about them for years. And while their names imply that these two loans are opposites of each other, the reality is that forward and reverse mortgages have more in common than you may think…
Title and Home Ownership
One of the most common misconceptions surrounding reverse mortgages is that the bank or lender takes ownership of your home. This is false. Like a traditional mortgage, the title to your home remains in your name when you take out a reverse mortgage. No matter which loan you choose, you maintain the title and ownership of your home.
Taxes, Insurance, and Home Maintenance
Because you are the owner of your home, both loans require that you continue to pay property taxes, homeowners insurance, and basic home maintenance and repairs. Outlined in the terms of both loans, if these obligations are not fulfilled, you assume the risk of foreclosure on your home.
With both loans, lenders need to ensure that you have the necessary resources to afford the associated financial obligations. As such, you will need to undergo a financial assessment before being approved for either loan. These assessments typically require you to submit additional documentation to the lender, which may include credit history, income verification, a residual income analysis, or even calculations for life expectancy set-asides. It’s all about protecting your financial future.
Now that we’ve covered some of the key similarities both forward and reverse mortgages share, it’s important to note the differences. And when it comes to reverse mortgages, there are a few distinct features for senior homeowners looking to improve their financial situation.
While traditional mortgages require borrowers to make a payment towards their loan balance every month for several years, reverse mortgages do not require borrowers to make any monthly mortgage payments. You can pay as little or as much as you want, as often as you’d like. If you have an existing mortgage on your home, the proceeds from the reverse mortgage are first used to pay off that loan. And since no monthly mortgage payments are required on the reverse mortgage, you can eliminate that monthly expense and leverage the remaining cash to use however you wish.
Both forward mortgages and reverse mortgages are, indeed, loans—so they’ll both need to be repaid. While traditional forward mortgages are typically paid off via monthly payments to the lender, gradually shrinking the loan balance, the reverse mortgage repayment process is a bit different. As you draw on the equity in your home, interest will accrue on the loan, causing the balance to increase.
Unlike a forward mortgage where you start making payments toward your loan balance almost immediately, the repayment of a reverse mortgage loan is deferred. The loan only becomes due and payable when you no longer live in the home or are unable to meet the loan terms. Deferring repayment is especially beneficial for senior homeowners living on a fixed income because it frees up cash that would otherwise be tied up as a substantial monthly expense.
Unlike forward mortgages, reverse mortgages are non-recourse loans. But what exactly does this mean for you and your heirs? Simply put, as a borrower, you or your heirs will never owe more than the value of your home. A comforting aspect in an uncertain housing market, non-recourse loans ultimately protect your heirs by allowing them to sell the house and use the proceeds to repay the loan in its entirety. No other assets can be taken from your heirs to repay the reverse mortgage loan.
Now that you know the facts about how a reverse mortgage stacks up against a forward mortgage, which way will you go?
Your decision to opt for a forward or reverse mortgage depends on several factors, including where you are at this point in your life—both personally and financially. Available to homeowners age 62 and older, a reverse mortgage can provide a wealth of benefits—but it has to be right for you.
At Longbridge Financial, we adhere to the highest standards of ethics and keep our customers first. If we ever feel that a reverse mortgage isn’t right for you, we’ll say so. Not all lenders make this pledge.