You may think you understand reverse mortgages—and you probably do. They are, simply put, a type of mortgage that allows you to receive payments from your home equity rather than make them. It’s a negatively amortizing loan, meaning the balance grows over time, instead of falling.
But there are some benefits that borrowers might not consider initially, that give reverse mortgages some outside-the-box applications that could help you improve your financial situation.
One little known fact, for example, is that you can get a reverse mortgage and can actually make payments on it. 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 would you want to get a reverse mortgage and not receive payments from it? Here are a few reasons.
1. There are no income or credit requirements.
Where you might have difficulty qualifying for a conventional, or “forward” mortgage or refinance because your income or credit don’t meet the requirements, you may still be able to qualify for a reverse mortgage.
2. There’s no missed-payment penalty.
If you have a reverse mortgage on your home but opt to make payments (without any penalty) in an effort to maintain the equity while still remaining there, 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 is a relatively new kind of reverse loan that has a much lower upfront cost than the traditional product. The Home Equity Conversion Mortgage “Saver” (or “HECM Saver”) does not carry the same upfront mortgage insurance premium that a standard reverse mortgage will have.
In turn, you are not allowed to borrow as much under this loan, but if you are looking to wipe out your mortgage payments by paying off your existing mortgage and then pay back at your leisure over time, the Saver may be a tool to help you achieve that.
What makes it possible to make payments on your reverse mortgage loan to pay it back over time is the fact that there are no prepayment penalties. So if you think about your forward mortgage and paying that off early, you’d likely be charged a prepayment penalty by your lender. For reverse mortgages, that penalty doesn’t exist.
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 give you a sense of what a payment plan might look like, take a look at All Reverse Mortgage amortization calculator. You can enter the approximate payments you plan to make, and 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 the option of making payments in advance of the loan becoming due. If you have a reverse mortgage line of credit, there are no restrictions and you can pay any amount at any time.
If you have a closed-end reverse mortgage, any payment you make toward the loan balance cannot then be re-borrowed.
Finally, if you have a loan under which you receive tenured payments over time, you will have to change your payment plan option in order to apply prepayments to your loan.