What Is The Difference Between A Reverse Mortgage And A Regular Mortgage?

Many people have heard of a reverse mortgage and may be wondering what the advantages of these loans are compared to a regular mortgage. Although both loans are labeled mortgages as they use a home as collateral, there are distinct differences between the two. While a regular mortgage has certain credit requirements and must be paid back to the lender, reverse mortgages offer access to equity built in homes for older homeowners, without the need to pay back the loan within their lifetime. For many people approaching or already in retirement, it can be an excellent way to bolster their retirement income.

What is a Reverse Mortgage?

In a report to Congress from the Consumer Financial Bureau, it was estimated that for least half of older homeowners, equity in their homes was the majority of their net worth. For many of these 62-years and older Americans, this is money that they could use as they approach or begin their retirement. What a reverse mortgage does is allow these homeowners to use this equity without the need to pay back the loan, while still retaining ownership of their home.

Unlike a regular mortgage, a reverse mortgage is not solely based on credit scores or income requirements. As long as there is enough equity in the home, usually between 22.4% to 38.1% or higher, and the other legal requirements are met, many homeowners can get a reverse mortgage. Some of the legal requirements include:

– Loan applicant must be 62-years or older

– The home must be the primary residence

– The home must have a permanent foundation

Starting in 2014, it is expected that a financial assessment will be performed on applicants, to ensure they have the cash flow to continue paying taxes and insurance on the home.

If a person qualifies for a reverse mortgage and owns their home outright, he or she can generally receive 48% of the appraised value at age 62-years of age, possibly more if they are older. This payout does not require any loan payments to be made as long as the homeowner continues to live in the home. The loan only becomes due when no one who is on the reverse mortgage lives in the home, either due to selling the home, moving for medical care reasons or after the death of the loan recipient.

How Does a Reverse Mortgage Work?

Although there are big differences between a regular and reverse mortgage, there is one similarity: both can be used to buy a new home. Many people do not realize that reverse mortgages are not only for homes that are already owned and have equity; they can also be used for purchasing a home. Homebuyers that meet the age requirement for a reverse mortgage can get a new home without ever needing to make a mortgage payment. They only need to make a cash down payment of at least 50% of the appraised value of the home. This is perfect for retirees that have decided to downsize their home or are moving to a new area after retirement.

The biggest difference between a regular and reverse mortgage is the loan payments. Reverse mortgages never require the loan to be repaid while they live in the home, and homeowners can use the money from the loan in any way they choose. It is a great way to use the equity in a home to make life easier in the later years in life.