Reverse vs. Forward Mortgages
By Tyler Plack
Tyler Plack is the President of South River Mortgage. Tyler holds an active FHA Direct Endorsement (DE) underwriting certification and is the author of The Retirement Solution: Maximizing Your BenefitTyler is a seasoned entrepreneur and real estate investor renowned for his expertise in reverse mortgages and his commitment to addressing seniors' equity challenges. Tyler brings a unique perspective to his ventures, having built several successful companies throughout his career. His insights are frequently sought by industry publications, where he is recognized for his vast knowledge in the realm of reverse mortgages.
An avid investor in income-producing properties, Tyler is dedicated to helping seniors navigate their financial needs with compassion and expertise. When Tyler is not helping solve America's retirement crisis, he is a skilled pilot flying airplanes for fun.
Reverse mortgages and forward mortgages are two types of loans that use your home as collateral, but they operate in nearly opposite ways. Knowing the differences in who makes payments and how your equity changes will help you choose the option that matches your goals.
We break down reverse vs. forward mortgages in clear terms so you can decide the right path for your financial future.
Understanding Forward Mortgages
A forward mortgage is just another name for a traditional home mortgage. It’s a loan that you take out to buy a home or refinance an existing home loan. With a forward mortgage, you borrow a lump sum up front and then repay the lender over time with monthly payments.
Each monthly payment includes principal and interest. Over a typical loan term, such as 15 or 30 years, the balance gradually goes down. Your equity in the home increases as you pay off what you owe. In other words, you build ownership stake over time.
Forward mortgages are available to any adult who qualifies financially, meaning there’s no upper age restriction. A lender will approve you based on your ability to make monthly payments. This means you’ll have to show sufficient income, assets, and credit history to prove you can afford the loan and other housing expenses.
Understanding Reverse Mortgages
A reverse mortgage is, as the name suggests, almost a reversal of a traditional mortgage. It is a special loan designed for older homeowners to tap into their home’s equity.
If you take out a reverse mortgage, the lender pays you for equity in your home. Payments can come as a lump sum, a line of credit, monthly installments, or a combination of these. The interest on the loan adds up over time and gets added to your loan balance each month.
Most reverse mortgage programs require you to be at least 62 years old to qualify. You have to own your home outright or have a very small mortgage balance that can be paid off with the reverse mortgage funds. You also have to live in the home as your primary residence.
Importantly, even though you don’t make loan payments, you remain the owner of the home. You’re still responsible for home maintenance, and you have to keep paying property taxes and homeowners’ insurance premiums. Failing to pay these can lead to default on your reverse mortgage, just as it could with a forward loan.
A reverse mortgage doesn’t have a fixed term. It becomes due if you move out permanently, sell the home, or pass away. At that time, the loan plus interest will be settled through the home’s sale. If your heirs want to keep the house, they can choose to refinance or pay off the loan balance.
Most reverse mortgage plans use a non-recourse structure. This means that the loan balance can’t exceed your home’s value. If the balance outgrows the appraised value, FHA insurance on HECM loans absorbs the difference.
How to Make the Right Choice for Your Needs
When you’re deciding between keeping or getting a forward mortgage versus taking out a reverse mortgage, consider the following.
- The Payout Structure That Fits Your Budget
If you’re struggling with day-to-day expenses or have a big expense coming up, a reverse mortgage can provide funds without adding a monthly bill. Many seniors use reverse mortgage proceeds to pay off an existing forward mortgage, eliminating that monthly payment and improving cash flow.
- Your Capacity for Ongoing Expenses
With a reverse mortgage, you must keep the home as your primary residence and stay current on property taxes, insurance, and maintenance. A forward mortgage adds a monthly payment on top of those costs, so compare both scenarios to see which you can afford over the long haul.
- Your Expected Length of Stay
If you intend to stay in your home for the rest of your life, a reverse mortgage can be very useful because it allows you to leverage equity for income. However, if you think you might sell the house in a few years to downsize or move closer to family, a reverse mortgage could eat into your sale proceeds for a relatively short-term benefit.
In a short time frame, a forward refinance or a HELOC could be a better way to access some equity.
- Your Inheritance Interests
If leaving the home free and clear to your children or other heirs is a major goal, a forward mortgage is a good choice, even if you never pay it off in full. A reverse mortgage, by design, will result in less equity for your heirs. They may have to sell the house in order to pay the balance.
Your Path to a Secure Retirement
If a reverse mortgage fits your retirement plan, the team at South River Mortgage can guide you through each step. We’ll explain current loan rates and help you pick a loan that matches your home’s value, financial goals, and vision for retirement. Reach out to learn more.
