A standard mortgage and a reverse mortgage are similar in many ways but have some key differences. Below is a summary of each.
Similarities:
· Both loans are secured by notes and deeds on real property.
· Both loans require homeowners to be responsible for property taxes, insurance, and maintenance.
· In both cases, the owner of the property retains ownership, and is entitled to the equity in the property, meaning the market value of the property over and above the amount of the mortgage.
· Both loans include charges for interest.
· Both loans can be refinanced.
· Both loans can be used to purchase property.
· Both loans require an assessment of financial position in order to obtain, although very different as outlined below.
Differences:
- In a standard mortgage, the lender loans the entire loan amount up front and the homeowner then makes payments to the lender, while in a reverse mortgage, there are numerous ways for a borrower to receive loan proceeds from the lender1. The loan is due and payable in full when the borrower sells the property, vacates the property, or passes away.
- Reverse mortgages are designed for retirees and require a borrower to be 62 years of age or older2, while standard mortgages can be taken out by anyone who meets the lender’s requirements. Further, a reverse mortgage is only available for a borrower’s principal residence.
- Qualifying for a standard mortgage involves meeting debt to income ratio guidelines that account for the mortgage payment, in addition to credit and asset reserve guidelines, while the reverse mortgage is a residual income test to ensure the borrower can afford their monthly bills in addition to the property charges (property tax, insurance, HOA dues, maintenance, etc.). In certain circumstances if these tests cannot be met, a borrower may be able to obtain a reverse mortgage with set-asides (reserve accounts for property taxes and insurance premiums) to meet those future property charges over the life of the loan.
- A reverse mortgage is a non-recourse loan3, meaning that if the proceeds from the ultimate sale of the property are insufficient to pay off the mortgage and accrued interest in full, the balance is forgiven, with no IRS implications.
- A line of credit for a HECM reverse mortgage can never be reduced or capped due to declining real estate values or other market conditions, while a standard Home Equity Line of Credit can be adjusted at the discretion of Bank4
- Periodic payments are required on a standard mortgage, whereas they are purely voluntary on a reverse mortgage. Interest accrues on a reverse mortgage and can be paid either at the end of the loan term or anytime while the loan is outstanding. There may be certain tax strategies for such payments on a reverse mortgage5.
In summary, both standard and reverse mortgages are simply mortgage loans secured by a borrower’s real property that charge interest. The key differences lie in how those funds are distributed and repaid. Reverse mortgages are very complex and versatile programs that can meet a variety of financial needs for senior borrowers in their retirement years. Contact me to discuss your situation and what specific benefits can be achieved.
Footnotes and Estimated Posting Dates:
1. Reverse mortgage borrowers can take a lump sum distribution, a partial distribution, a line of credit, fixed payments for a certain term, fixed payments for the life of the loan, or a combination of these methods.
2. Certain Reverse mortgage programs offer benefits to borrowers 55 years of age and older. See HECM and Proprietary Reverse Mortgage Differences and Similarities, and Additional Solutions with Proprietary Product (7/30/24).
3. See Non-Recourse nature of a Reverse Mortgage
4. See Standard Heloc vs. Reverse Mortgage Line of Credit
5. See Tax Strategies.
