Bonnie B. has sent the following question in the ask ARLO! blog:
My interest and Mortgage insurance are adding $1,100.00 to my principal each month because my rate has gone up 2% in the last year—my Line of credit has $60,000 and grows by $245.00 a month. I would like to start putting my prepayments on the unpaid principal. My loan states that I can specify if I want to have the prepayments put on the principle as a payment. This would lower the amount of fees charged and place the $400.00 a month that I request to have to be put on the principle as a payment. Is that right?
If I am understanding your question correctly, you are not reading the provision correctly. The option to specify the placement of your prepayment to either your monthly payments or your line of credit refers to borrowers who have a portion of their line being used for more than one purpose.
Those borrowers have a Modified Term or Modified Tenure loan in which their reverse mortgage is available to them as both a line of credit on which they can draw funds as needed/desired AND they receive a monthly payment from the lender.
If you have this arrangement, and you make a prepayment, then you can choose to which portion of the outstanding Principal Balance the prepayment will be credited.
Let’s use an example:
Suppose you have $100,000 outstanding in your line of credit portion and you also have $50,000 outstanding in your Tenure portion from a $500 per month payment you receive for a total outstanding balance of $150,000.
If you make a $25,000 repayment, you can choose if you want it to go to the portion of the loan that funds the line of credit ($100,000 outstanding) or the monthly payment ($50,000 outstanding).
If you choose the line of credit, you would have that much more money available in your line of credit. If you choose the monthly payment, it would change the structure of your payments and therefore, would require the lender to refigure the new payments based on the terms of the Term or Tenure that you have chosen.
If you do not specify, the lender will automatically put them in your available line of credit or create a new line of credit if you had no funds available in your old line.
If you look at the section, I have included from the Note below, it specifies how the funds will be applied by the lender. Your choice is whether you want the funds to go to a line of credit, or to a monthly payment being made to you on your loan.
The “payment option” is not what I think you are thinking it is and a $400 repayment would make an extremely small difference in the amount of a monthly payment being made to you even if you are currently receiving a monthly payment.
It would seem more reasonable that this might be an option that a borrower might choose who was making a very large repayment and then wanted a steady income back from a one-time repayment of funds.
Taken from Reverse Mortgage Deed of Trust
BORROWER’S RIGHT TO PREPAY:
A Borrower has the right to pay the debt evidence by this Note, in whole or in part, without charge or penalty. Any amount of debt prepaid will first be applied to reduce the Principal Balance of the Second Note described in Paragraph 11 of this Note and then to reduce the principal balance of this Note. All prepayments of the Principal Balance shall be applied by Lender as follows: First, to that portion of the Principal Balance representing aggregate payments for mortgage insurance premiums; Second, to that portion of the Principal Balance representing aggregate payments for servicing fees; Third, to that portion of the Principal Balance representing accrued interest due under the Note; And Fourth, to the remaining portion of the Principal Balance. A Borrower may specify whether a prepayment is to be credited to that portion of the Principal Balance representing monthly payments or the line of credit. If Borrower does not designate which portion of the Principal Balance is to be prepaid, Lender shall apply any partial prepayments to an existing line of credit or create a new line of credit.