Reverse Mortgage vs. Forward Mortgage: An🤡 🔯Overview

A forward mortgage is a mortgage loan used to purchase a home that typically involves a fixed interest rate and monthly payments. Conversely, a reverse mortgage allows home💫ow🍷ners 62 and older to convert their home equity into cash, getting paid by the lender via monthly payments, a credit line, or a lump sum.

With a 澳洲幸运5官方开奖结果体彩网:forward mortgage, your loan balance decreases as you make payments, increasing your home equity. However, your loan balance with a reverse mortgage increases due to your withdrawals, reducing your home equity. The reverse mortgage lender 🌱also charges interest and fees that are added to the loan ba🌌lance, reducing your equity. The reverse mortgage gets repaid when the homeowner passes away, sells or leaves the home.

Both forward and reverse mortgages are significant financial commitments that use your home as 澳洲幸运5官方开奖结果体彩网:collateral. A homeowner might use their home as collateral twice in a lifet🎉ime, getting a forward mortgage to purchase the home and, decades later, a reverse mortgage to withdraw income from the home. Discover the similarities and differences between a forward mortgage and a reverse mortgage.

Reverse Mortgage

A reverse mortgage allows homeowners to withdraw their home equity value and get paid via a lender as a lump sum, monthly annuity, or 澳洲幸运5官方开奖结果体彩网:line of credit. The funds from a reverse🅰 mortgage can be used witꦯhout restrictions, including to pay medical expenses, debt consolidation, home repairs, and supplement income.

Reverse Mortgage Costs

The accumulated debt, interest, and fees on a reverse mortgage are due when the mortgage holder moves, sells the home, or dies. Like a traditional forward mortgage, you will pay 澳洲幸运5官方开奖结果体彩网:closing costs for a reverse mortgage.

One of the costs includes the 澳洲幸运5官方开奖结果体彩网:mortgage insurance premium (MIP) paid to the lender, which is 2% of the home value paid upfront at the loan closing and 0.5% of the outstanding 🉐loan balance paid annually thereafter.

Other costs include third-party charges, such as 澳洲幸运5官方开奖结果体彩网:appraisal, title search, and insurance fees as well as 澳洲幸运5官方开奖结果体彩网:property taxes. The lender charges an origination fee to process the loan, which is the greater of $2,500 or 2% of the first $200,000 of your home's value and 1% over $200,000 but are capped at $6,000.

Federally Regulated

The federal government regulates reverse mortgages to prevent predatory lenders from snaring senior citizens. The bank may not demand a payment that exceeds the value of the home. The bank recoups any losses through an insurance fund, which is oᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚne of the costs of the reverse mortgage.

The 澳洲幸运5官方🌳开奖结果🌱体彩网:Department of Housing and Urban Development (HUD) oversees the most common reverse mortgage, called a 澳洲幸运5官方开奖结果体彩网:home equit🥀ꦜy conversion mortgage (HECM), which is issued through private lenders but insured by the 澳洲幸运5൲官方✨开奖结果体彩网:Federal Housing Administration (FHA).

Forward Mortgage

A forward mortgage is a loan used to buy a home or real estate, which is typically a fixed-rate 30-year term. As you make payments, your loan balance decreases, increasing your home equity. Other mortgage products exist that include a 15-year or 20-year term, as well as 澳洲幸运5官方开奖结果体彩网:adjustable-rate mortgages that have a 澳洲幸运5官方开奖结果体彩网:variable interest rate for a portion of the term.

Borrowers may get a 澳洲幸运5官方开奖结果体彩网:better interest rate and save a substantial amount in interest over time if they go for a 10- or 15-year ꦇmortgage. However, the shorter the term, the higher the monthly payment. Like a reverꦯse mortgage, the home serves as collateral for a forward mortgage loan.

Closing Costs and Down Payment

With a forward mortgage, 澳洲幸运5官方开奖结果体彩网:closing costs usually include a 澳洲幸运5官方开奖结果体彩网:down payment basedꦅ on a percentage of the🍌 home's value. Typically, mortgage lenders require 20% down, paid at the closing.

However, programs exist for first-time homebuyers through the 澳洲幸运5官方开奖结果体彩网:Federal Housing ꩵAdministration (FH🧸A), which insures mortgage loans, protecting lenders. This protection allows lenders to offer a lower down payment by as low as 3.5% for qualified buyers. The 澳洲幸运5官方开奖结果体彩网:FHA insures its loans, protecting the lender, but you must go through an FHA-approved lender.

Risks of Borrowing Too Much

The mortgage system is based on the assumption that real estate increases in value over time. That is often the case, but not always, for example, when the 澳洲幸运5官方开奖结果体彩网:housing bubble burst in 2008. As of 2010, over 23% of homes were underwater, according to Housing Wire, but the state of financing has improved in the decade since then. As of the third quarter of 2024, (the most recently available data), 1.8% of American mortgaged homes—or 990,000 homes—were underwater according to Housing Wire and CoreLogic's Homeowner Equity Insights report. That means that the owners of those homes must continue to pay inflated mortgages or pay their banks 25% or more above their homes’ assessed value when they sell.

Speaking of getting into trouble, during the housing boom, it became common for homeowners to obtain a line of credit, using their homes as collateral in addition to their mortgages. Both the homeowners and the꧙ir bankers assumed that the significant increases in home values wo♔uld keep going. When the bust came, homeowners got stuck holding the double debt for the mortgage and the line of credit.

Reverse Mortgage vs. Forward Mortgage Example

A married couple, each about 30 years old, buys a home with a small down payment. They are promising to pay the money b♚ack in small monthly increments of principal plus interest over a period of years. Thirty years is tradiꦉtionally the standard.

More than 30 years later, the same couple lives in the same house, having paid off the mortgage in full. Even with their combined 澳洲幸运5官方开奖结果体彩网:Social Security benefits and retirement savings, it’s difficult to make ends meet, so they take out a reverse mortgage. They’ll pay nothing upfront and get a monthly check to supplement their income. They never pay off the mortgage or the int💧erest and costs that accrue over the years. However, the loan must be repaid when they pass away, sell the home, or leave the home.

The Bottom Line

With a forward mo♎rtgage, or mortgage loan, you borrow money to buy a home and, in return, make monthly payments to the lender who charges you a fixed rate of interest on the loan. Once you pay off the loan, you own the home.

Conversely, a reverse mortgage allows those 62 and older to get paid using their home's equity via monthly payments, a credit line, or a lump sum. In return, the lender charges interest and fees, which get added to the loan balance, reducing your home's equity. You repay the reverse mortgage when you sell or leave the home. Both a forward and reverse mortgage use your home as collateral for the loan.