Reverse Mortgage vs. Forward Mortgage: An Overview

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 a reverse mortgage. Whether you go with a forward or reverse mortgage depends upon where you are at this point in your life—personally and financially.

Only people age 62 and above are eligible to get a reverse mortgage.

If you are under 62, the closest equivalent to a reverse mortgage is a home equity line of credit (HELCO). This is a set amount of money that you can draw upon at any time, for any reason. However, your home acts as collateral for a HELOC.

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 a forward mortgage at purchase and then, decades later, a reverse mortgage.

Key Takeaways

  • Reverse and forward mortgages are large loans that use your home as collateral.
  • Forward mortgages, more commonly just called mortgages, are loans used to purchase a home.
  • Reverse mortgages, which require you to be 62 years old or older, allow homeowners with large amounts of equity in their home to borrow a lump sum or annuity-like payment.
  • Reverse mortgages have no monthly payments and the balance—plus interest—is due when the borrower, dies, sells the home, or moves.

Reverse Mortgage

Reverse mortgages are regulated by the federal government in order to prevent predatory lenders from snaring senior citizens. However, the government can’t prevent senior citizens from fooling themselves.

Homeowners can get the entire amount of the loan as a lump sum 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. Homeowners may also opt to get the money as a monthly annuity or line of credit.

The accumulated debt and interest on a reverse mortgage, plus costs, is due when the mortgage holder moves, sells the home, or dies. This could mean the heirs have to pay the loan. The standard grace period is six months.

There is one consumer-friendly note: 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. The Department of Housing and Urban Development (HUD), which oversees the dominant reverse-mortgage program, moved in the fall of 2017 to shore up that insurance fund.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

Forward Mortgage

When compared to the typical 30-year mortgage, borrowers may get a better interest rate, and save a substantial amount in interest over time if they go for a 10- or 15-year mortgage. However, that takes a fair degree of confidence that your income and expenses will stay steady or improve in the years to come.

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 May 2020 3.6 million American homes—or 1 in 15 of all homes with mortgages—were still “seriously underwater,” according to an ATTOM Data Solutions 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 May 2020, ATTOM Data Solutions released its U.S. Home Equity and Underwater Report for the first quarter of 2020. It revealed that underwater properties made up 6.6% of all mortgaged properties in the U.S., up from 6.4% in the fourth quarter of 2019.

Reverse Mortgage vs. Forward Mortgage Example

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 is traditionally 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 take out a reverse mortgage. They’ll pay nothing upfront 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.