What is a Forward Forward
A forward forward is a private agreement between two parties to engage in a loan transaction in the future. The lender agrees to lend the borrower funds on a specified future date. The borrower agrees to repay the loan, plus a premium, at a date beyond the loan issue date.
BREAKING DOWN Forward Forward
Forward forward agreements are also known as forward rate agreements. In these contracts, the two parties determine the interest rate to be earned or paid out starting on a date in the future. For example: On January 1st, Company A agrees to loan Mr. X $10,000 on June 1st. Mr. X agrees to repay Company A the original $10,000 plus an additional $1000 on December 1st. The $1000 is similar to paying interest on the loan.
Forward is a common term to describe the timing and rate of an asset purchase. A forward contract, for example, entails an agreement to purchase an asset at a future date at a specified price, the forward price. Forward contracts differ from spot or cash transactions that occur and settle immediately at the prevailing spot price or cash price.
Forward contracts are traded over-the-counter and technically a mortgage could be considered a forward contract. Settlement of a forward contract on the specified date can be made in cash or by delivery of an asset, such as wheat or gold. Forward contracts are similar in structure to futures contracts but are less regulated than futures, which trade as standardized legal contracts on an exchange. The private nature of forward contracts gives them more flexibility in negotiating terms but also subjects the parties to greater risk of non-repayment on the part of the lender or failure to receive delivery of an obligation or asset in the case of the borrower.
How Forward Forward Applies to Mortgages
A forward can be used to distinguish a traditional mortgage or forward mortgage from a reverse mortgage. With a forward mortgage, a mortgage lender agrees to extend an individual a residential mortgage loan. The mortgage holder, in turn, agrees to pay back the mortgage principal and interest every month for a set period, typically 15 or 30 years. A reverse mortgage, on the other hand, generates a monthly payment to a homeowner who has completely paid off their forward mortgage. These reverse mortgage payments accrue a balance against the value of the home that must be repaid after death by the homeowner’s heirs, either through a lump sum or through the sale of the home.