If you’ve never heard of a “forward mortgage,” there’s a reason for that. The term refers to traditional mortgages and is rarely used except in comparison with its polar opposite, the “reverse mortgage.” So which way do you want to go? Whether you go forward or in reverse depends upon where you are at this point in your life, personally and financially.

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Before going any further, it should be noted that only people age 62 and above are eligible to get a reverse mortgage – and 62 is young to get one. The older you are, the more money the bank will be willing to lend to you.

If you are under 62, the closest equivalent to a reverse mortgage for you is a home-equity line of credit (see Reverse Mortgage or Home-Equity Loan?). This is a set amount of money that you can draw upon at any time, for any reason. Be very careful. You’re betting your house on your ability to repay that money, with interest. A home-equity line of credit is sometimes known as a “second mortgage.” However, a home-equity loan can only be called that if the borrower still has a first mortgage in place. If the first mortgage has been paid off, a home-equity loan is simply a mortgage.

That said, both forward and reverse mortgages are essentially huge loans that use your home as collateral – and they're major financial commitments. A couple might use a single home as collateral twice in a lifetime, getting first a forward mortgage at purchase and then, decades later, a reverse mortgage. Here’s how it works:

  • A married couple, each about 30 years old, buys a home with a small down payment. They are promising to pay the money back in small monthly increments of principal plus interest over a period of years. Thirty years has traditionally been the standard.
  • More than 30 years later, the same couple is living in the same house, having paid off the mortgage in full. Even with their combined Social Security benefits and retirement savings, it’s difficult to make ends meet, so they go for a reverse mortgage. They’ll pay nothing up front and get a monthly check to supplement their income. In fact, they never pay off the mortgage or the interest and costs that accrue over the years. However, in the future their heirs must do so, either by selling the family home or with a lump sum. (For more, see How to Avoid Outliving Your Reverse Mortgage)

These are straightforward examples. The variations are pretty much limitless, but there are pitfalls to consider in each. For example:

Risks in a Forward Mortgage

  • You may get a better interest rate, and save a substantial amount in interest over time, if you go for a 15-year or even a 10-year mortgage. That takes a fair degree of confidence that your income and expenses will stay steady or improve in the years to come. You might also consider getting the 30-year mortgage and making extra payments when you can. That enables you to whittle away at your debt and reduce your overall interest payment without the burden of a higher required payment.
  • The mortgage system is based on the assumption that real estate increases in value over time. That truism proved false when the housing bubble burst in 2008. As of August 2017 more than 5.4 million of American homes – about  9.5% of all homes with mortgages – were still “seriously underwater,” according to a RealtyTrac survey. That means their owners 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 home as collateral, in addition to their mortgages. Both the homeowners and their bankers assumed that the big increases in home values would just keep going. When the bust came, homeowners got stuck holding the double debt, for the mortgage and the line of credit. In February 2018 Attom Data Solutions released its 2017 U.S. Year End Home Equity and Underwater Report. It revealed that underwater properties decreased 0.3% year over year in the fourth quarter of 2017 to 9.3%, the smallest year-over-year decrease in the share of underwater properties since Attom began tracking in 2012.

    Risks in a Reverse Mortgage

    As this fact page from the National Council on Aging shows, reverse mortgages are regulated by the federal government in order to prevent predatory lenders from snaring senior citizens. (For more, see Rules for Obtaining an FHA Reverse Mortgage.) However, the government can’t prevent senior citizens from fooling themselves. For instance:

    • Homeowners who obtain a fixed-rate reverse mortgage get the entire amount of the loan at settlement, with no restrictions on its use. The expectation is that they will pay off their outstanding debts and use any remaining funds to supplement other sources of income. The temptations are obvious.
    • If a homeowner goes for a flexible-rate mortgage, the money may be taken out in a lump sum, a monthly annuity or a combination of both. It, too, is entirely flexible. Any money not taken out at the settlement is available as a line of credit. Again, temptation looms.
    • The accumulated debt and interest on a reverse mortgage, plus costs, is due when the mortgage holder moves, sells the home or dies. That means you or your heirs have to cough up a large sum of money, one way or another, and fast. The standard grace period is six months.

    There is one consumer-friendly note, though, in these uncertain times: The bank may not demand a payment that exceeds the value of the home. The bank recoups the loss through an insurance fund that was one of the costs of the reverse mortgage. Even better, the Department of Housing and Urban Development, which oversees the dominant reverse-mortgage program, moved in the fall of 2017 to shore up that insurance fund.

    The Bottom Line

    If this seems to add up to a lot of risks, there’s still the big reward of living in a home you own in an era in which few can afford to pay all cash down. Both the standard forward mortgage and the reverse mortgage allow many of us to do just that, at two key stages of our lives. Armed with the facts, and some common sense about spending, you can take advantage of them safely. (For more, see Reverse Mortgage Pitfalls.)

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