What is a forward mortgage?

At some point in your life, you may want to purchase a home. It’s an exciting step, but one that comes with a major financial barrier. Very few people are able to pay for a home outright; instead, they finance it through a mortgage. For many, that often means applying for a forward mortgage loan specifically.

A forward mortgage is a type of mortgage loan where a lender provides funds to a borrower to purchase a property or refinance a mortgage. In exchange, the borrower agrees to repay the loan, plus interest, over a set period, usually 15 or 30 years. As the borrower makes payments, the amount owed on the loan decreases and the equity in the property increases.

If the concept sounds familiar, that’s because it likely is. Forward mortgages are what most people think of when you envision a typical mortgage loan. That said, forward mortgages actually represent an umbrella of more specific mortgage types. 

Forward mortgage vs reverse mortgage

Forward mortgages are the opposite of reverse mortgages. A forward mortgage is a traditional mortgage, where a borrower takes out a loan from a lender to purchase a home. The borrower makes monthly payments to the lender, which include both the principal and interest on the loan. As the borrower makes payments, the amount of the loan decreases, and the equity in the home increases. Over time, the borrower builds up equity in the property, which can be used for a variety of purposes, such as refinancing or taking out a home equity loan.

A reverse mortgage, on the other hand, is a type of loan that allows homeowners who are 62 years of age or older to access the equity in their home without having to sell the property. With a reverse mortgage, the lender makes payments to the borrower, based on the equity in the home. The borrower is not required to make any payments to the lender, and the loan is typically repaid when the borrower sells the property, moves out, or passes away.

While both forward mortgages and reverse mortgages allow homeowners to access the equity in their homes, there are some key differences between the two. With a forward mortgage, the borrower is responsible for making monthly payments, while with a reverse mortgage, the lender makes payments to the borrower. Additionally, with a forward mortgage, the borrower's equity in the property increases over time, while with a reverse mortgage, the borrower's equity decreases as the loan is repaid. Finally, a forward mortgage is typically used to purchase a home, while a reverse mortgage is used to access equity in an existing home.

The benefits forward mortgages

The accessibility of forward mortgages makes them a straightforward option for virtually anyone buying a home. Here’s a look at the benefits of forward mortgages and why they’re such a staple for financing home purchases:

Access to homeownership 

Forward mortgages lower the barrier for purchasing a property. Whether it’s the 20% of a conventional loan or the 3.5% of a VA loan, the down payment sum needed to secure a forward mortgage is typically much easier for people to come up with. It’s the difference between $40,000 and $200,000! With the availability of flexible loan products and low-interest rates, more people now have access to homeownership. 

Equity building

As you make your mortgage payments, a portion of the payment goes towards paying down the principal balance of the loan. Over time, this helps to build equity in your property, which represents the difference between the market value of the property and the outstanding mortgage balance.

Potential tax advantages 

Homeownership carries potential tax advantages such as deductions on mortgage interest rates and property taxes. By claiming these deductions, homeowners can reduce their taxable income. Forward mortgages are a lynchpin to homeownership and often central to these tax benefits. 

Predictable monthly payments 

The predictability of mortgage payments is one of the most significant advantages of forward mortgages. With a fixed interest rate, there’s no change in the owed amount month-over-month. Even with an adjustable rate mortgage (ARM), fluctuations in interest are easy enough to plan and budget for. 

Use a mortgage calculator to see how much payments might be.

Spread-out payments

Forward mortgages typically come with longer repayment terms, usually spanning 15 to 30 years. This allows borrowers to spread out their payments over an extended period, making homeownership more affordable by breaking down the loan into manageable monthly installments.