Rising Debt, Falling Equity

Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:

• your debt increases; and

• your home equity decreases.

It’s just the opposite, or reverse, of a forward mortgage. During a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more cash, and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home’s value is growing at a high rate. When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home’s value decreases, there may not be any equity left at the end of the loan. In short, a reverse mortgage is a “rising debt, falling equity” type of deal. But that is exactly what informed reverse mortgage borrowers want: to “spend down” their

home equity while they live in their homes, without having to make monthly loan repayments.

(To make certain you understand what “rising debt” and “ falling equity” mean, read the Appendix at the end of this booklet.)

Exceptions

Reverse mortgages don’t always have rising debt and falling equity. For example, if a home’s value grows rapidly, your equity could increase over time. But most home values don’t grow at

consistently high rates, so the majority of reverse mortgages end up being “rising debt, falling equity” loans.

Common Features

Although there are different types of reverse mortgages, all of them are similar in certain ways. Here are the features that most have in common.