Fraction Mortgage vs. reverse mortgage

Whether you’re looking to supplement your retirement income, planning to make a large purchase, or financing home improvements, tapping your home equity may be the next logical step in your financial journey.

Thankfully, there are more options available to tap into your home equity. These include home equity loans, cash-out refinancing, reverse mortgages, and home equity lines of credit (HELOCs).

Even new-and-improved versions of traditional products are picking up steam. The Fraction Mortgage, for example, is an innovative take on the HELOC with preferable terms for homeowners, such as optional monthly payments and appreciation-based interest rates.

On that note, let’s compare the reverse mortgage against the Fraction Mortgage — two home equity products that allow American homeowners to tap home equity with no required monthly payments.*

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Reverse Mortgage

A reverse mortgage, as the name suggests, is a mortgage that pays you rather than you paying it. Sounds too good to be true? Well, you might want to keep reading. 

There are many types of reverse mortgages available to Americans. These include home equity conversion mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages.

For the purposes of this comparison, we’ll focus on HECMs as they are the most common and are federally insured by the FHA. When we refer to “reverse mortgages”, you can assume we are describing HECMs unless otherwise noted.

Since reverse mortgages are loans secured against your property, an interest rate will accrue throughout the loan’s lifetime, increasing the balance due. When your reverse mortgage term ends, you will likely be required to sell your home to settle the balance.

Qualifying for a reverse mortgage is far more nuanced than traditional financing options such as home equity loans and HELOCs. For instance, you and your spouse must be 62 or older (note: some proprietary reverse mortgage providers accept as low as 55 years), the home must be your primary residence, and you must own the home outright (or a considerable portion).

When determining whether or not to approve your reverse mortgage, mortgage providers will consider the age of the individuals on the title, along with the location, condition, type, and appraised value of your home. 

If you do qualify for the reverse mortgage, you must not vacate the home for more than 12 months or risk having your balance made due. If this occurs, a reverse mortgage provider will force you to sell your house to settle the balance. 

If you fail to pay property taxes, home insurance or do not keep up with general upkeep of the property, the reverse mortgage provider has it in their rights to have the loan made due.

Reverse mortgages are also known for having quite the grueling application process (including mandatory counseling sessions) and require borrowers to pay mortgage insurance premiums. 

All that being said, with stricter qualifications and terms comes some favorable protections for you as the homeowner. For example, if your home depreciates to the point that it is no longer profitable for the mortgage company, they cannot foreclose your home or force you to leave. However, if your spouse is under 62 years at the time of signing and thus left off the title, they would not have these same protections.

If your spouse does not qualify, they could lose the house when the individual on the title moves out or passes on.

When considering a reverse mortgage, make sure to do your due diligence.  As a product targeted at aging and potentially vulnerable homeowners, the industry has attracted several scams to trick you out of your home. If the offer sounds too good to be true, it probably is.

Depending on your situation, a reverse mortgage may be the right choice for you. Granted, in a time when we see a lot of innovation in the home equity space, it is not your only option.

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Fraction Mortgage

The Fraction Mortgage is an increasingly common way for homeowners to borrow against their home equity with no required monthly payments.

Unlike a reverse mortgage, there is no minimum age requirement to qualify, and you aren’t restricted to your primary residence. You can take out a Fraction Mortgage on your primary, secondary, and investment property, allowing you to benefit from the growing real estate market. Fraction Mortgage users also enjoy a more streamlined application and qualification process.

In technical terms, the Fraction Mortgage is a first-lien home equity line of credit. You may be wondering what a lien is. In essence, a lien denotes who gets paid first when settling a debt.

Many mortgage products are “second lien,” such as some HELOCs and home equity loans, which are often seen as riskier for both the borrower and the provider.

As the lender in first position (or first lien), Fraction can offer you favorable terms like no monthly payments required.* If you still hold a mortgage balance when applying for a Fraction Mortgage, a portion of the funds received from Fraction will be used to pay off your entire mortgage, putting them in the first position on your home.

Another unique aspect of the Fraction Mortgage is the interest rate tied to your home's appreciation. If your home grows in value at a rate above Fraction’s minimum and below the maximum, then the interest rate on your loan will match appreciation. Click here for Fraction’s latest rates.

Many homeowners prefer appreciation-based rates because they make it possible to sustain their portion of home equity. For example, if you borrow 30% of your home equity, you would owe 30% by the end of the term. In this case, a considerable portion of your home equity would still be yours to leverage as you see fit.

Similar to a reverse mortgage, a Fraction Mortgage does not require you to make any monthly payments. Instead, your balance (principal + interest) becomes due at the end of a 5 year term, with the option to renew your loan for another 5 year term.

Additionally, you can make prepayments at any time during the loan term. As a HELOC product, you can make draws up to the amount prepaid if you are still within the draw period (the first ⅓ of the loan term).

With the Fraction Mortgage now on the market, more homeowners have the freedom to tap their home equity without adding any monthly expenses. Fraction Mortgages have helped homeowners reduce their debt to income ratio (the amount spent monthly paying back debt) by up to 50% simply by removing mandatory monthly payments.

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Critical differences between reverse mortgages and Fraction Mortgages

Reverse mortgages and Fraction Mortgages allow homeowners to turn their hard-earned home equity into cash, with no required monthly payments. Where they differ most is in their loan terms, age requirements, and qualifying properties. 

For more details, here is a more comprehensive comparison of reverse mortgages and Fraction Mortgages.

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Receiving your funds

• Reverse mortgage: Option to receive funds in monthly payments, a lump sum, or as a form of revolving credit.
• Fraction Mortgage: Funds are received as a lump-sum payment at the beginning of the term. Any amount repaid can be redrawn during the draw period.

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Interest rates

• Reverse mortgage: Fixed or variable rates are available. Variable-rate mortgages are tied to the prime rate charged by commercial banks.
• Fraction Mortgage: Fixed rates only. For the latest Fraction Mortgage rates, click here.

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Payment schedule

• Reverse mortgage: No monthly payments are required. However, if you leave your home for more than 12 months (even for medical reasons), fail to pay property taxes or insurance, or your home is not maintained correctly, your loan becomes due.
• Fraction Mortgage: 100% optional monthly payments. You can choose when and how often you make payments. The loan becomes due at the end of the term with the opportunity to refinance. Note that refinancing is subject to appraisal and a 1% refinancing fee*.

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Age Requirements

• Reverse mortgage: Must be 62 years or older to qualify for an insured reverse mortgage. Some uninsured options are available at 55+ but may not include the same terms or protections.
• Fraction Mortgage: No age restrictions.

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Credit Score & Income

• Reverse mortgage: No income or credit score requirements. Must prove that you can cover property taxes, insurance, and other ownership expenses. 
• Fraction Mortgage: Minimal income requirements. A fair credit score is required (approx. 640). Must prove that you can cover property taxes, insurance, and other ownership expenses. 

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Qualifying properties

• Reverse mortgage: Primary residence only. Must remain in the home.
• Fraction Mortgage: Primary residence only. Must remain in the home.

Risk protection

• Reverse mortgage: The amount owed will never be more than what your home is worth, even if the balance exceeds the home value.
• Fraction Mortgage: The amount owed will never be more than what your home is worth, even if the balance exceeds the home value.

Early repayment

• Reverse mortgage: Early repayment incurs a penalty.
• Fraction Mortgage: No exit fees.

Which is cheaper — reverse mortgage or Fraction Mortgage?

It depends. Reverse mortgages and Fraction Mortgages have comparable origination fees and closing costs, including the cost of an appraisal and credit checks. However, a reverse mortgage is generally more expensive due to the longer term, mortgage insurance premiums, and service fees.

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Which gets you funds faster — reverse mortgage or Fraction Mortgage?

The Fraction Mortgage is faster since closing requirements are more straightforward, and the application is more streamlined. Applicants can receive funds in as little as 3 weeks.

A reverse mortgage is the slowest of any financing option (including HELOCs and home equity loans) as it requires many meetings and counselling sessions to finalize.

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Which is right for you — reverse mortgage or Fraction Mortgage?

Reverse mortgages and Fraction Mortgages both have their advantages and disadvantages.

As a general rule of thumb, a reverse mortgage is preferred for homeowners who want a guaranteed interest rate regardless of the high cost or equity depletion and are comfortable with giving up their home once they move out or pass on.

A Fraction Mortgage, on the other hand, is a more flexible option for homeowners who want more money upfront — especially younger borrowers. With more open qualifications, no age restrictions, shorter terms, and no exit penalties, a Fraction Mortgage gives you the flexibility to leverage your equity without required monthly payments* — all without locking you into a long-term commitment.

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.