You may have heard the term amortization used in the context of mortgage loans. Basically, amortization is the way in which the principal of a loan is paid down.
When it comes to mortgages, it's most important to know that they are typically amortized loans, meaning the borrower makes equal payments over the life of the loan. Part of each payment is applied toward the interest, and the remaining portion is applied toward the principal. Mortgage calculators that also produce an amortization schedule will show you how each payment will be applied over the life of your loan.
Generally, at the beginning of the loan, the interest payment will comprise a large part of each repayment. As the principal is gradually paid off, however, less interest is accrued. Thus, a greater portion of each repayment will be applied toward principal. (This is why financial experts recommend paying extra principal on a loan if possible, because doing so reduces the interest accrued, and therefore also reduces the total cost and life of the loan.)
A reverse mortgage is a loan taken out on a property that is owned free and clear by the borrower (i.e., there is no existing mortgage). Typically, reverse mortgages are taken out by older homeowners who spent years paying off the original mortgage, and now wish to have additional income. In the United States, borrowers must be at least 62 years of age to qualify for a reverse mortgage. Essentially, a reverse mortgage simply means the homeowner is borrowing money with the property acting as collateral. Reverse mortgages generally are approved for a portion of the home's total value.
Unlike conventional mortgages, a borrower with a reverse mortgage is not required to repay the loan unless he or she sells the property or moves out. Therefore, a reverse mortgage is actually negatively amortized, meaning the loan amount increases over time. This is because no payments are being made, so the interest owed increases, which in turn increases the total loan amount.
A reverse mortgage also becomes due when the borrower dies. The borrower's heirs can then retain the property by paying off the reverse mortgage.
