A reverse mortgage allows you to receive payments from your home equity rather than make a monthly payment to repay the obligation.
One little-known fact, for example, is that you can get a reverse mortgage and can make payments on it when that meets your goals and if you want to. Or, you can turn it into an interest-only mortgage, meaning you don’t pay toward the principal of the loan, just the interest that’s accruing.
Why make interest repayments on a reverse mortgage loan?
1. Easier to qualify compared to conventional loans.
You may still be eligible for a reverse mortgage if you have difficulty qualifying for a conventional or “forward” mortgage or refinance because your income or credit doesn’t meet the requirements.
2. There’s no missed-payment penalty.
Suppose you have a reverse mortgage on your home but opt to make payments (without penalty) to maintain the equity while remaining there. In that case, you won’t face a downside if you miss a payment. It’s entirely up to you how much you want to put toward the reverse mortgage.
3. There’s a low-fee option available.
While many people tend to focus on the costs associated with getting a reverse mortgage, there are often options available that will allow a lender to pay some or most of the costs for you (and that doesn’t mean finance them in the loan – if this is available the lender writes the check to pay these costs on your behalf).
What makes it possible to make payments on your reverse mortgage loan to pay it back over time is that there are no prepayment penalties. If you consider your forward mortgage and paying that off early, your lender would likely charge a prepayment penalty.
For reverse mortgages, that penalty doesn’t exist. And because the payment is optional, if your income is sporadic, you can pay at any time without fear of adverse credit reporting if you can’t pay sometimes or want to wait for next month.
The Big Picture
Ultimately, setting up a payment plan with your reverse mortgage will allow you to eliminate your mortgage but maintain your home equity over time, leaving your future options open.
To understand what a payment plan might look like, look at our reverse mortgage amortization calculator. You can enter the approximate payments you plan to make. The calculator will generate the loan balance and interest that accrues over time.
Depending on the type of reverse mortgage you have, there may be some limitations to making payments before the loan becomes due. If you have a reverse mortgage line of credit, there are no restrictions, and you can pay any amount anytime.
If you have a closed-end reverse mortgage (the fixed-rate, lump sum draw option), any payment you make toward the loan balance cannot then be reborrowed. Finally, if you have a loan under which you receive tenured payments over time, you must change your payment plan option to apply prepayments to your loan.
How do you pay the interest on a reverse mortgage?
Does a reverse mortgage continue to accrue interest if you don’t make payments?
What happens when you pay down a reverse mortgage loan?
How does interest work on a reverse mortgage?
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