What is the Difference Between a Reverse Mortgage and a Forward Mortgage?

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Before you start to panic because you are trying to purchase a home and you do not even know what a forward mortgage is do not worry. A forward mortgage is just your typical and traditional type of mortgage. The term forward mortgage is largely only ever used when being compared to a reverse mortgage. But, maybe you are unaware of what either of these terms really mean. We will endeavor to define both for you, and explain the most important differences between to two in order to expand you mortgage knowledge and increase your homebuying competence.

Forward Mortgage

As I stated previously a forward mortgage is just a term that is used rarely to refer to traditional mortgages when being compared to reverse mortgages. But still, what exactly is a forward mortgage?

A forward mortgage is the type of mortgage loan you will take out to initially purchase a home. When you are in the younger stages in your life and you want to buy a home you will traditionally need a loan to help you purchase your home, as it is unlikely you will have enough money to pay for the home in its entirety. A loan from a financial institution allows you to purchase a home and live in it now, and then make regular payments to your lender in the form of interest and capital payments over a previously agreed period of time.

This system of mortgages is based off of the assumption that the value of the property you purchase will increase over time. That way both you and the bank will benefit from deciding to purchase the home in the future, and be able to make money if you ever decide to sell the home in the future.

Reverse Mortgage

A reverse mortgage is something typically targeted at senior citizens looking to find some extra money in the later stages in their life, usually for retirement. By the time a home owner has reached a more advanced age and has spent many years making payments to their lender on their original mortgage loan on a home, the have accumulated a significant amount of equity in their property. An older home owner can use the equity they have accumulated in their home to borrow against its value in the form of a line of credit, a lump sum, or payments made at a regular interval.

What is different about this type of loan is that it does not require the borrower to make loan payments like you would with a forward mortgage. Instead, the balance of the loan only becomes payable once once the borrower moves away for good, sells the home, or dies.