Forward vs. Reverse Mortgages: Which is Right for You?
If you’re not too familiar with the concept of “reverse” mortgages, you might be wondering how these loans differ from traditional or “forward” mortgages.
While there are some similarities between the two types of loans, they’re actually quite different in ways that may be very beneficial to senior borrowers. Depending on your current situation, getting a reverse mortgage might be a better option for you than a conventional loan.
“Forward” Mortgages
When getting a “forward” mortgage, the home buyer is required to make a down payment, typically between 10% and 20% of the home’s value.
In return for providing the loan—which covers the rest of the home’s value—the lender will charge the borrower an interest rate that depends on the market and product type.
To qualify for a mortgage, borrowers are required to show they have the income to fulfill all financial obligations—including existing car or student loans and credit card bills. To verify this, lenders will typically require that borrowers provide pay stubs and their job history.
Credit history is another important factor, and lenders can require borrowers to have a certain credit score—the higher the better—in order to qualify for a loan and a favorable interest rate.
With forward mortgages, the borrower also must make payments to the lender each month until the loan is paid off. Failure to repay the loan on time can result in foreclosure.
“Reverse” Mortgages
Like traditional loan products, a reverse mortgage loan is secured by a borrower’s home, but in other ways it is very different.
The Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program requires borrowers to be at least 62 years of age and have a sufficient amount of equity in their homes.
The HECM allows borrowers to tap into that equity in their home. No monthly mortgage payments are required and any existing mortgage loan is paid off using the proceeds from the reverse mortgage loan. The amount of money available depends on the borrower’s age, home value, and current interest rates.
Borrowers can receive the money through monthly payments, a lump sum, through a line of credit, or some combination of these options. The payment form will depend on whether the borrower chooses a fixed or adjustable interest rate.
Which is right for me?
The reverse mortgage program typically has fewer requirements for prospective borrowers. Credit history and income generally aren’t as restrictive in the application process as they are for “forward” mortgages, which could be a big advantage for people on a fixed income.
Another key difference has to do with loan repayment. Reverse mortgage borrowers are not required to make monthly mortgage payments on their home. However, the loan becomes due when the borrower passes away or leaves the home. At that point, the loan must be repaid in full.
Unlike a traditional loan, reverse mortgages are non-recourse, meaning that a borrower will never owe more than the value of their home —a comforting aspect of the loan in times when home values have declined.
While reverse mortgages offer these great features, this type of loan isn’t for everyone. In order to qualify, you must meet the age requirements and have a sufficient amount of equity in your home. Like with any mortgage, you’re required to keep the home in good condition and stay current on taxes and insurance.
At the end of the day, if you’re looking to remain in your home and have access to the equity you’ve built in your home, a reverse mortgage may bea great option.