Forward Mortgages Versus Reverse Mortgages
There has been a lot of attention paid lately to the subject of reverse mortgages, with many seniors choosing this option. But what exactly are reverse mortgages, and how do they compare with the standard forward mortgages that people are more familiar with?
A forward mortgage means that you have a sum of money for your property that you need to begin paying on right away. Your lending institution fronts you the money you need to give to the people selling their home, and the next month you have an amount due. You need to keep paying on this mortgage until you pay it off.
With reverse mortgages, however, the loan and repayment options are a bit different. You receive your money as a lump sum up front, or as monthly payments, or as a line of credit that you can access when you need it. With reverse mortgages, your home equity becomes a cash cow that you use as you see fit. There are no monthly payments; the amount you’ve borrowed or used becomes due when the homeowner dies, sells the home, or moves from it permanently.
If there is no cash to pay reverse mortgages upon the homeowner’s death, and they haven’t paid this debt already, then the bank seizes the home much the same way they do during a foreclosure. There is a grace period before this happens when the heirs of the former owner can pay the amount of the loan so as to keep the home; many children opt to do this in order to keep the home within the family.
With forward mortgages, there are of course credit checks and many other requirements before you qualify. With reverse mortgages, there really aren’t these checks or requirements. You simply need to own your home outright. If a homeowner still has a forward mortgage on their home, the money from reverse mortgages first needs to pay off that balance before it can be accessed for any other reason.
Forward mortgages require certain income levels and job stability, but reverse mortgages are only available to those that are aged 62 or older. Obviously there are no income requirements then with reverse mortgages; the value of the home is what assures the mortgage note, not the income of the homeowner.
There are many things to remember when it comes to reverse mortgages. For one, remember that you are using the equity in your home. If you planned on leaving your home to your children or selling it in order to finance your retirement plans, you’re using up that value.
Also, children often do not appreciate finding out about reverse mortgages after their parents have passed on, as this is yet another part of a complicated probate process that they’re unprepared to deal with. All in all, anyone looking at reverse mortgages for themselves would do well to read all the paperwork carefully and be sure they understand what’s required of them before signing on the dotted line.
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