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 a monthly payment to repay the obligation.
They are, simply put, a type of mortgage that allows you to receive payments from your home equity rather than make a monthly payment to repay the obligation. 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 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.
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 are often options available that will allow a lender to pay some or most of the costs for you (and that doesn’t mean just finance them in the loan – if this is available the lender actually 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 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. And because the payment is totally optional, if your income is sporadic, you can pay at any time without fear of negative credit reporting if you can’t pay sometimes or just 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 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 (the fixed rate, lump sum draw option), 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.
How do you pay the interest on a reverse mortgage?
Reverse mortgage borrowers receive a statement from the servicer monthly. Among other things (like the servicer’s name, phone number, address and the borrower’s loan number), the statement tells them the amount of interest that accrues, the balance owed and the remaining amount of money available to the borrower on the loan. If you wish to pay the interest as it accrues on the loan, you need this information to send a check into the servicer. Remember, your loan documents outline how any payments received will be credited and they will go first to the mortgage insurance. Next any payments will be credited to any fees or any amounts the lender has had to advance on your behalf, if any (most loans today do not have recurring fees like servicing fees but loans originated long ago commonly had a $25.00 monthly servicing fee). Then the payments will be credited to interest and then to outstanding principal balance. You cannot just indicate that you would like funds applied to interest ahead of the other items that will be paid first.
Does a reverse mortgage continue to accrue interest if you don’t make payments?
Reverse mortgages are like any other loans in that they will continue to accrue interest as long as there is an outstanding loan balance until the day the loan is paid in full.
Can I pay the interest monthly on a reverse mortgage?
Yes, you can but remember, your loan documents outline how any payments received will be credited and they will go first to the mortgage insurance. Next any payments will be credited to any fees or any amounts the lender has had to advance on your behalf, if any (most loans today do not have recurring fees like servicing fees but loans originated long ago commonly had a $25.00 monthly servicing fee). Then the payments will be credited to interest and then to outstanding principal balance. You cannot just indicate that you would like funds applied to interest ahead of the other items that will be paid first.
What happens when you pay down a reverse mortgage loan? Fixed vs adjustable
A fixed rate reverse mortgage is a closed-ended loan which means there can only be one draw, regardless of whether you pay the balance down or not. If you pay the balance down with a fixed rate you owe less and accrue less interest but cannot borrow any more money. With an adjustable-rate loan, the answer is different. The loan is open-ended so if you pay down the balance, you can reborrow any funds that the repayment frees up on your line of credit. You can reborrow funds on an adjustable-rate line of credit as long as you have funds available on the line.
How does interest work on a reverse mortgage?
Reverse mortgage loans accrue interest on the outstanding balance of the loan. If the borrower uses the loan as it is intended (making no monthly mortgage payment), the balance will grow as the interest owed is added to the loan balance (in addition to the mortgage insurance renewal premium). Borrowers are not required to make a payment on the loan as long as they live in the home and meet the loan requirements (pay the property taxes, insurance, HOA dues if any and maintain the home in a satisfactory manner) but they may choose to do so at any time without penalty.
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