We are always trying to move forward in life. However, in retirement, there are at least three areas where you might want to hit reverse and go backwards:
- Reverse Aging: Where is that fountain of youth anyway? While creams and potions promise to reverse aging, there are actually a few things proven to make us younger: exercise, a good diet and a feeling of purpose.
- Reverse Commute: When you don’t have a regular job to go to everyday, you might be facing more freedom and far less traffic. Go where you want to go. Do what you want to do!
- Reverse Mortgage: You have worked hard to pay for your home. Maybe it is time to let your home pay you. A reverse mortgage let’s you stay in your beloved house while tapping money as a hedge against the financial markets or as a way to make ends meet.
How do reverse mortgages work? Is backwards better?
Most people are accustomed to the benefits of traditional forward mortgages — the type of mortgage you probably got when you bought your home.
However, when you turn 62, you may become eligible for a reverse mortgage.
While both types of mortgages are loans, they are very different from each other. They have different purposes. They work in different ways. And they have vastly different benefits. Here we try to compare how they vary. Decide for yourself if backwards is better when it comes to mortgages in retirement…
Title and Ownership
On this point, reverse mortgages and forward mortgages function the same. You own the home. You are on the title.
- Forward Mortgage (FM): You own the home even though you have borrowed money.
- Reverse Mortgage (RM): You own the home even though you have borrowed money.
Trade Offs
- Forward Mortgage (FM): When you get a forward mortgage, you are trading the promise of making loan payments for a specified period of time for home ownership.
- Reverse Mortgage (RM): When you get a reverse mortgage, you are trading the promise of paying back the loan amount at an unspecified time in the future for access to cash, a line of credit or monthly income.
Paying or Getting Paid
- FM: When you have a forward mortgage, you make payments every single month to pay down your balance.
- RM: A reverse mortgage pays you. You receive proceeds from the bank in the form of a loan. Reverse mortgages have no payments ever (although taxes and insurance must be maintained). Reverse mortgages are specifically designed for seniors who may have more limited income and might not be able to afford payments.
Loan Amount
- FM: When you get a forward mortgage, you borrow a big amount of money all at one time to help you pay for the house.
- RM: When you get a reverse mortgage, you can borrow a very small amount or a larger amount at the beginning and then access more money as you need it if there are funds available.
Interest
- FM: With a forward mortgage you pay interest on the entire loan amount. And the loans are usually enormous. And because the length of time you will have the loan (term) is already defined, the amount of interest you will pay is usually figured out at the start of the loan.
- RM: When you get a reverse mortgage, you only pay interest on the amount of money you use. And, because you don’t know how long you will have the loan (the loan comes due when you die or decide to move out of the house), you won’t know how much interest you will owe. However, you will never owe more than the value of the home at the time you repay the loan.
Options and Decisions
- FM: When you get a forward mortgage, the main option you get to choose is the term of the loan — the number of years you will be paying off the loan.
- RM: The key decision you make when you get a reverse mortgage loan is how you want to take the money. You can opt for a lump sum, a line of credit or a monthly paycheck.
- A lump sum is just up front cash
- A line of credit makes the full loan amount available to you, but you only accrue interest on the money you withdraw.
- The monthly paycheck option gives you a monthly paycheck for the rest of your life — no matter how long that turns out to be. And, even if you receive more money than the home is worth, you still only have to repay the value of the home when the loan comes due.
Eligibility
- FM: To qualify for a forward mortgage, you must have good credit and the proven ability to pay back the loan every month.
- RM: To qualify for a reverse mortgage, you must be 62 years old and have sufficient equity. Because you are not making monthly payments, a reverse mortgage does not have income requirements, but you do need an independent financial assessment to make sure that the loan is a good and sustainable option for you.
Fees
- FM: All mortgages have fees associated with them — closing costs that can include origination fees, appraisals, inspections and more.
- RM: Reverse mortgage fees are similar to those paid for forward mortgages. However, reverse mortgage fees are generally higher but they are built into your loan amount so you aren’t having to finance anything out of pocket.
Loan Balance
A loan balance is what you owe the bank.
- FM: When you get a forward mortgage, you have a huge balance at the beginning of the loan and you try to pay that down over time.
- RM: When you get a reverse mortgage, the loan amount grows. Whatever money you use from the loan starts to accumulate interest. So you usually owe more when the loan becomes due than at the start. Most people pay back the reverse mortgage loan with the sale of the home — you get to keep whatever you don’t owe on the reverse mortgage and you don’t owe more than the value of your home.
Cash Flow
- FM: A forward mortgage decreases your cash flow — you are writing checks every month for the mortgage that you might want to spend on something else. But every check you write to pay down the forward mortgage increases your equity.
- RM: A reverse mortgage increases cash flow by eliminating mortgage payments and providing you with access to money — you have more cash flow at your disposal. However, a reverse mortgage decreases your equity — the money you borrow accumulates interest.
