January 19, 2023

Why is it Called a “Reverse Mortgage”?

Let’s examine exactly what the term reverse mortgage means and how it works differently from a traditional mortgage. When you make a payment on your traditional mortgage, the balance goes down up an infinitely small amount each month. But with the reverse mortgage, you don’t need to make a principal and interest payment, so each month; the balance goes up an infinitely small amount. This is called reverse amortization.

Let’s see how reverse amortization works in a reverse mortgage. A senior homeowner borrows 50% or less of the value of their home with a reverse mortgage. That means that the homeowner is getting a home appreciation on a value twice the amount of interesting curve on a reverse mortgage.

At 4% appreciation, the average appreciation rate nationally since 1960 also means that the home’s value is typically growing faster than the loan balance. The net result is a home’s equity can increase even though the principal and interest payments are not made. So, a portion of the home’s appreciation can cover the carrying cost of the mortgage, turning appreciation into cash flow. To find out more, call us today!

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