One of the most frequently asked questions about reverse mortgages is, “How does it differ from a traditional mortgage?” With a traditional mortgage, you make your payments each month, slowly chipping away at the loan balance a little bit at a time. But with a reverse mortgage, those monthly principal and interest payments are eliminated, so the balance goes up by that same amount. Unlike a traditional mortgage, where the borrower pays the lender, the lender makes payments to the borrower. And that’s where the reverse mortgage gets its name. To better understand how reverse amortization works in a reverse mortgage, let’s look at a typical scenario. Bob takes out a reverse mortgage for 50% or less of the value of his home, and in the process the home appreciates in value at twice the rate of the interest he’s paying on the reverse mortgage. That means that his home equity increases … even though he’s not making monthly principal and interest payments anymore. In this example, the value of the home is growing faster than his loan balance… turning appreciation into cash flow for Bob to use to fund his retirement. He can use those funds to renovate his home, fund a grandchild’s education or purchase a new car.
Whiteboard Videos for Financial Advisors, Loan Officers and Reverse Mortgage
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