Reverse mortgages and traditional mortgages actually only have a few common denominators. Both involve home equity, loans, and being repaid. The manner in which each is approached and methodology behind them are substantially different.
Requirements
A traditional mortgage will typically involve a credit and employment check to ensure that the borrower can repay the loan. The financial institution issues a mortgage against the property you are buying with the loan. Failure to repay the institution on a mortgage allows them to foreclose and claim the property.
A Reverse Mortgage does not operate in the same fashion. When a borrower takes out a reverse mortgage, there is no credit check or employment check. The borrower must already own their home. They are simply borrowing against the equity they already have in their house. There is no mandatory monthly payment for a reverse mortgage as you are simply cashing out part of your home’s equity in the form of a cash loan. Reverse Mortgages typically require their borrowers to be over 62.
Repayment and Penalties
The repayment of both loans is drastically different. With a traditional mortgage the borrower will typically put up a down payment and then make monthly payments to the financial institution. As they pay more on their mortgage it whittles away and eventually becomes theirs. Should the borrower default the institution can claim the house as repayment.
Reverse Mortgages are paid off typically under a few conditions. When all of the owners of the property die, the house is sold, or the borrower moves out; the loan must be repaid. Until the contractual obligations are met, there are no payments made on the mortgage. This allows home owners to borrow against the equity of their home to obtain cash. When the contractual obligations are met, the loan becomes due. It can either be drawn from inheritance, paid off with money left over from the Reverse Mortgage, or the heirs may take out a traditional mortgage to pay it off.
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