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You’ve probably heard people say that reverse mortgages are complex. I’d argue they are simply unfamiliar. Most homeowners have spent decades paying a traditional, or “forward,” mortgage. So, when they encounter a reverse mortgage, the structure feels foreign. Maybe they just need to learn a different language.
Let’s translate.
REPAYMENT TERMS
At their core, reverse and forward mortgages aren’t opposites. If a homeowner with a reverse mortgage chooses to make monthly payments the same way they did with a traditional mortgage, the outcome would look very similar: the loan balance would shrink over time.
The key difference is that reverse mortgages don’t require monthly principal and interest payments. Consequently, reverse mortgage loan balances will typically increase over time. That doesn’t make it risky. Rather it reflects a loan designed to support cash flow during retirement instead of repayment.
INTEREST RATES
Most forward mortgages keep things simple: One interest rate and its one job is to determine interest and monthly payments.
Reverse mortgages, specifically the FHA-insured Home Equity Conversion Mortgage (HECM), use two rates, each with a distinct purpose:
- Expected Rates are used to calculate how much money the homeowner qualifies for at the beginning of the loan.
- Note Rates are used to calculate how the interest accrues and how the line of credit grows after the loan closes.
Also, while most forward mortgages are fixed-rate loans, most reverse mortgages are adjustable-rate. This variable rate structure allows homeowners to access funds over time instead of taking everything upfront.
THE LANGUAGE OF REVERSE
One of the biggest hurdles for both borrowers and loan originators is terminology. Reverse mortgages use different words because they solve different problems.
NOTE: REVERSE plus software allows the user to use the forward language equivalent if desired.
Here are a few key TERMS to know:
- Principal Limit Factor (PLF) – Forward loans use the term Loan-to-Value (LTV) instead. But reverse mortgages use PLFs, which account for the borrower’s age and interest rates to determine borrowing capacity.
- Mandatory Obligations – These are items that must be paid at a reverse mortgage closing, such as existing mortgages and closing costs. This figure may influence how much money is available to the borrower in the first year.
- Financial Assessment – Reverse mortgages are underwritten for sustainability. Lenders review credit history, property charge history, and residual income to ensure the loan works long-term.
- Life Expectancy Set-Aside (LESA) – Since reverse mortgages don’t build a traditional escrow account, a portion of available funds may be set aside to pay property taxes and insurance over time.
- Non-Recourse Protection – All U.S. reverse mortgages are non-recourse. That means neither the homeowner nor their estate will owe more than the home is worth when it’s sold, no matter how long the loan lasts.
Reverse mortgages aren’t just loans, they solve critical issues related to longevity, cash flow, and housing stability. To do that one must understand the repayment terms, rates, and be able to speak the language of reverse. Once you do, you’ll find that reverse mortgages aren’t complex at all.