There’s a good reason why you’ve never heard of a forward mortgage. The term is rarely used, save when contrasting a reverse mortgage with traditional mortgages. The decision regarding a forward or reverse mortgage will depend on your current financial and personal circumstances
A home equity line of credit is the closest alternative to a reverse mortgage if you are under 62. (HELOC). You may use this predetermined amount of money for any reason and at any time. However, a HELOC uses your house as security.
Both forward and reverse mortgages are substantial loans that are secured by your home and require significant financial commitments. In their lifetime, a couple may obtain a forward mortgage at the time of purchase and a reverse mortgage decades later to use the same home as collateral twice.
- Large loans known as reverse and forward mortgages use your home as collateral.
- Loans used to purchase a home are known as forward mortgages, or simply mortgages.
- With a reverse home, homeowners with significant amounts of equity in their mortgages can borrow a lump sum or an annuity-like payment if they are 62 years of age or older.
- The remaining balance, plus interest, is due when the borrower passes away, sells their home, or decides to move, and reverse mortgages don’t require monthly payments.
- A reverse mortgage can only be obtained by those who are 62 people of age or older.
Reverse vs. Forward
The federal government regulates reverse mortgages to stop predatory lenders from ensnaring senior citizens. The government, however, cannot stop seniors from deceiving themselves.
At settlement, homeowners are eligible to receive the full amount of the loan as a lump sum with no usage limitations. It is anticipated that they will pay their financial debts and use any money left over to supplement other sources of income. The money can also be obtained by homeowners as a line of credit or a monthly annuity.
When the mortgage holder moves, sells the home, or passes away, the reverse mortgage’s accumulated debt and interest, plus costs, are due. This might imply that the loan is due from the heirs. A six-month grace period is the norm.
One consumer-friendly point is that the bank cannot request a payment that is greater than the value of the home. A fund for insurance that was one of the reverse mortgage’s costs helps the bank recover the loss. In the fall of 2017, the Department of Housing and Urban Development (HUD), which is in charge of the popular reverse-mortgage program, took action to strengthen that insurance fund.
If borrowers choose a 10- or 15-year mortgage instead of the typical 30-year mortgage, they may get a better interest rate and save a lot of amount in interest over time. To do that, though, you’ll need to have a fair amount of faith in your ability to maintain or increase your income and expenses in the years to come.
The mortgage system is predicated on the idea that value values rise over time. That truism was disproven in 2008 when the housing bubble burst. According to an ATTOM Data Solutions survey, 3.6 million American homes, or 1 in 15 of all mortgage-financed homes, were still “seriously underwater” as of May 2020. This means that when they sell, the owners of those homes must either pay their banks a 25 percent or higher premium over the assessed value of their homes, or continue to pay inflated mortgage mortgages.
Speaking of getting into trouble, it became common for homeowners to obtain a line of credit in addition to their mortgages during the housing boom, using their home as collateral. The mortgage holders and their homeowners both believed that the significant increases in home values would continue. Homeowners were forced to carry a double debt for the mortgage and the line of credit when the bust hit.
ATTOM Data Solutions’ U.S. Home Equity and Underwater Report for the first quarter of 2020 was published in May 2020. It showed that 6.6 percent of all mortgaged properties in the United States were underwater, up from 6.4 percent in the fourth quarter of 2019.
Example of a Forward Mortgage vs. a Reverse Mortgage
A married couple, both of whom are in their years, makes a small down payment on a home. Over a number of years, they promise to pay the money in small monthly payments of the principal plus interest. The customary length is thirty years.
The same couple has remained in the same home for more than 30 years and has completely paid off the mortgage. They take out a reverse mortgage because they find it difficult to make ends meet even with their combined Social Security benefits and retirement savings. They will pay a monthly check to supplement their income with no upfront costs. In actuality, they never pay the mortgage, let alone the costs and interest that have accumulated over the years. However, their heirs will be required to do so in the future, either with a lump sum payment or by selling the family home.