Traditional Mortgage Loans

With a standard mortgage a home buyer pays some percentage of the home value as a down payment, then pays off the home over time. Traditional mortgages can be structured as fixed rate or adjustable rate, and some loans can be designed around paying on principal or paying interest only.

Some investors chose to pay interest only to minimize the capital outlay, whereas it is much more common for the traditional home buyer to pay on the loan principal until the loan is paid off. Once the loan is paid off the home buyer owns the home.

Reverse Mortgages

In reverse mortgages, the homeowner already owns the home. A financial institution decides to pay cash to the homeowner for the equity built up in their home. When the homeowner dies or moves, the loan must be repaid by the borrower or their remaining family members.

It is common for the home to be sold off, and the proceeds used to pay down the amount owed on the reverse mortgage. Since interest accrues over time and many reverse mortgages are structured using monthly payments, the longer the homeowner lives the more of the home’s value goes toward paying off the reverse mortgage loan.

During a reverse mortgage the homeowner still owns the home, but must continue to maintain the house, pay taxes, and insure the home, or the loan can become due in full, forcing the homeowner to raise capital from friends and family or sell their home and move to another location.

Even if the homeowner lives longer than expected or the house value goes down the person getting a reverse mortgage can never owe more than their house is worth.