How Does a Reverse Mortgage Differ from a Typical Mortgage?

Traditional vs. Reverse Mortgage, what is the difference? This is a big question that many people have. The biggest difference is the way that monthly payments are made.

Traditional vs. Reverse Mortgage: Monthly payments

With a traditional mortgage, monthly principal and interest payments are made that slowly decrease the value of the loan balance. These payments are required each month.

With a reverse mortgage, those monthly principal and interest payments become optional each month. The loan balance instead increases by the amount of the principal and interest each month.

Example Scenario

Let’s break down a typical scenario for further explanation. Let’s say Bob takes out a reverse mortgage, which will be for about less than 50% of the value of his home. His home will appreciate, on average, about 3-4% each year (though that number was almost 17% in 2021). In this example, the equity that Bob owns in his home is still increasing even though he is not making these monthly payments. The value of his home may even be outgrowing the loan balance, which creates more cash flow in retirement. This also means that Bob will still have equity that he can pass down to his heirs.

What can you do with this extra cash from a reverse mortgage?

Now that you have all of this extra cash flow, there is plenty of options that you have:

  • Make some home renovations
  • Help fund a grandchild’s education
  • Buy a new car
  • Improve your retirement lifestyle.

 

For more information, watch this short video below.

 

If you believe you or a loved one could benefit from a reverse mortgage, contact us today!

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