Reverse Mortgage Vs. conventional forward mortgage. 

Which should I do?

A question I get quite often is regarding what type of mortgage is recommended for the consumer.  Many seniors fear reverse mortgages usually due to myths about them and have heard that they should stay away from them, but is aware of its great benefit for eliminating payments, a need or want they have.  So the question becomes, should I do a refinance and just reduce my payments to control the loan balance or go with a reverse mortgage?  Well, I thought I would write this article to compare the two mortgages to give better clarification on what type of mortgage is better suited for you. 

First of all, lets cover the basic differences between the two mortgages, then we can cover the details on both.  Here are the main features to consider when deciding what type of reverse mortgage to do:

You can see based on the chart that most features of these two mortgage types are the same.  There are however some differences between the two.  Lets cover the pros and cons of these feature differences in some detail.

• Personal recourse loan vs. non- recourse loan:

Personal recourse means that the lender has the right to pursue the borrower, their assets and estate in a default situation.  Basically this means that if a home is foreclosed on, the lender may file suit to get a judgment against the borrower, and upon getting the default judgment may pursue the borrower’s personal assets and bank accounts.  This is a key and important difference between reverse mortgages and regular forward mortgages.  A reverse mortgage is a non recourse loan- meaning the lender may only pursue the property the loan is secured against for collection efforts and not the person individually.  This protection is a huge benefit and is not common in the mortgage industry.  Forward mortgages offers no protection here and the lenders can in fact pursue the borrower and their estate for any shortfall they take on the loan.

The reverse mortgage is backed by FHA’s HECM program.  FHA charges an insurance fee for this benefit, however they state specifically in HUD’s Handbook 4235.1 REV-1, Home Equity Conversion Mortgages, provides in Paragraph 1-3C, that:

The HECM is a “non-recourse loan”. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

This means that in the event home values plummet or the loan balance grows higher than the home value, the borrower is protected and will never owe more on the home than its value.  They can sell at any time and move, and never have worry of recourse against other assets including any funds taken from the proceed of the reverse mortgage.  If home values increase and there is equity, the borrower or their estate gets the equity. (see also: what happens to my equity)

Benefit #1 goes to: The HECM reverse mortgage.

•  Lent only against the primary residence:

A reverse mortgage may only be made against the principle residence where the borrower lives.  This means a reverse mortgage may not be done on a 2^nd home or rental property.  A conventional forward mortgage may be completed against 2^nd homes and rental properties.

Benefit #2 goes to: The conventional forward mortgage- but only matters if the financing is being done on a 2^nd home or rental property.

1. May make payments each month vs. must make a payment each month:

On this one we will cover the top two listed items as they are closely related.  A forward mortgage requires a monthly payment.  If you do not make that payment the lender may take the home, and if losses follow may file for default judgment in most states and pursue personal assets. 

A reverse mortgage on the other hand does not require any monthly payments. However, there is no pre-payment penalty and the borrower can choose to make a monthly payment if they want.  As a result, a senior who feels they can make the payments and want to do so to keep the loan size from growing may still do so on a reverse mortgage, but if circumstance change they could simply stop paying and never worry about defaulting on the loan.  Most seniors do not make any payments as this is the whole idea behind the reverse mortgage, however this does not mean they can’t make payments if they wish to.

Benefit #3 goes to: The HECM reverse mortgage.

There are many details to consider when doing a reverse mortgage, however for most seniors wishing to stay in their home for some time a reverse mortgage will offer better personal protection, safer payment arrangements as there are no payments required, and better protection against the estate upon passing away. 

There are other considerations of the pros and cons of a reverse mortgage to make including that a reverse mortgage carries slightly higher closing costs to offset the insurance provided by FHA. However make sure to know all the facts before moving forward with your decision.   Feel free to use our reverse mortgage calculator to get detailed information of what a reverse mortgage can do for you.