Unlike most traditional mortgage loans, HECM reverse mortgage borrowers are not required to make monthly mortgage payments. Instead, payment is due in full either upon the sale of the home or when the borrower/borrowers pass away. They also have the option to pay back the loan before it becomes due with no prepayment penalty.
Borrowers who choose this route can make payments at their desired frequency through installments of their choice. Prepayment may be favorable for some, but not all borrowers, depending on their financial goals. It is definitely an advantage for their heirs if they intend to leave the property to them.
In the event that the heirs would rather keep the home than sell it, there are a number of reverse mortgage payoff options that they can explore. One of such is refinancing the house into another reverse mortgage amongst others.
Reverse Mortgage Amortization Schedule
Because reverse mortgages are negatively amortizing, there is a risk that the accruing interest and principal will cause the loan balance to exceed the value of the home. As the loan balance continues to grow over the years, the borrower may be left with little equity in their home. To avoid this risk and experience other benefits, it can be favorable for some borrowers to make payments on the loan before they are fully due.
In this case, some noteworthy information to equip yourself with include:
- The number of years left on the loan.
- The loan’s interest rate.
- The manner in which the loan could accrue interest all through its lifespan.
- The annual home equity balance.
- How the credit line may grow.
- Possibility of changes in the loan as time goes by.
Making these prepayments on a reverse mortgage can be extremely beneficial for the borrower’s heirs. If the borrower is able to pay off the entire loan before it becomes due, their heirs will be left with little to no existing debt upon inheritance. On the other hand, if the loan has not been fully paid off when the borrower dies, the heirs are responsible for the remaining balance, regardless of their intentions to occupy the property.
Additionally, making prepayments and paying down a reverse mortgage before it becomes due will open up a line of credit that the borrowers can draw from at their convenience with no withdraw fees or minimums. Unused funds in the line of credit will also grow over time.
Borrowers can also avoid negative amortization by making monthly interest payments. This may be the ideal route for borrowers who need the money in the short term for reasons such as paying down an existing mortgage or taking care of large medical bills. Deferring payments also provide borrowers with cash to use in the short term while other assets continue to grow.
Whether HECM borrowers choose to make prepayments or hold off until fees are due, the FHA required annual insurance premium protects them from paying more than their home value, even if the loan balance exceeds this amount.
Obligation of Homeowners
That being said, it is important to note that all HECM borrowers are also expected to continue paying their homeowners insurance, property taxes, and maintenance fees. Failure to keep up with these fees and maintenance may require the loan to be paid sooner.
Borrowers interested in prepayments should also take note of their interest rates before proceeding. With a fixed rate, the interest rate on the loan will not change even if the national rate changes. Those who have a fixed rate will be able to slowly pay off the loan, as long as all prepayments made exceed the interest accruing each month. However, when it comes to adjustable rates, the borrower should pay closer attention to the interest rates when making payments because they are subject to change from month to month.
Given the various options for paying down a reverse mortgage, it is recommended that borrowers get in contact with their loan servicer and set up a payment plan that abides by the servicer’s guidelines and enables the borrower to meet their goals.
Benefits of Reverse Mortgage Payment Plans
To further understand the benefits of reverse mortgage payment plans, take the following example of Sandy.
Sandy has a forward mortgage with a remaining balance of $175,717. At her current rate of 4.25%, it will take her 10 years to pay off this balance with monthly payments of $1,800. Sandy is eligible for a reverse mortgage that will lower her interest rate to 2.5%.
Because reverse mortgage payments are much more lenient than forward mortgages, Sandy can pay off the remainder of her forward mortgage through a number of flexible options. She can simply continue making monthly payments of $1,800 over the next 10 years and receive $15,224 cushion in cash or put that money away for later use. Sandy may also choose to put this extra cash towards paying off her forward mortgage early. She also has the option to make reduced monthly payments of $1,656.48 and still pay her balance off in 10 years. Finally, because the terms of a reverse mortgage protect the Sandy from incurring the late payment penalties, she has the flexibility to make payments at the frequency and amounts of her choosing.
Frequently Asked Questions
Can You Pay Off a Reverse Mortgage Early?
Yes, you can pay off your reverse mortgage early before you sell your home or move out of it or any other likely event. And given that most reverse mortgages come backed by HECM, you would not incur a penalty.
Who Pays Back a Reverse Mortgage?
A reverse mortgage could either be paid back by the loan undertaker or the heirs. The most common repayment method is usually by selling the home and then the proceeds would be used to pay back the loan in full. If there is anything left over, it would belong to the undertaker or the heirs.
What Happens If I Outlive My Reverse Mortgage?
Practically, you cannot outlive your reverse mortgage as long as at least one borrower lives in and occupies the property. The loan only becomes due when the last homeowner vacates the residence permanently.
You could spend all the money available to you in your Line of Credit. And if this happens, then you no longer have any more cash to draw on. However, the house is still yours and you can continue to live in it. You would also be obligated to continue to pay homeowner insurance, property taxes, as well as homeowner association dues (if any) as well as maintain the property.
Is There a Time Limit On Reverse Mortgages?
Reverse mortgages do not come with a time limit. However, they typically become due when the last existing homeowner vacates the residence permanently.
Can You Lose Your Home With a Reverse Mortgage?
Since your home is still yours in a reverse mortgage, then losing ownership is highly unlikely – except of course you do not maintain the three key components that guarantee your home’s legal standing. Recall that you’re simply leveraging on your equity to take out a loan that would be repaid via the proceeds from the sale of your home.
Do You Make Monthly Payments On a Reverse Mortgage?
A reverse mortgage does not require monthly payments. However, you could decide to pay back the interest on a monthly basis so that there is still something left over for your heirs when the home is sold.
Can a Reverse Mortgage Be Paid Back Early?
A reverse mortgage can be paid back early. The most common answer to “how do you pay back a reverse mortgage” is simply that the funds are recovered when the house is sold. However, considering “how to pay off a reverse mortgage early,” then you would have to come up with a personal plan that might involve making regular payments on a monthly basis.
The Bottom Line
Payments on a reverse mortgage come in different forms and it is solely based on the decision of the homeowner. If they decide to wait until after they have vacated the home, then this option is just fine. Monthly payments to reduce interest on the loan works just great too. At the end of the day, the loan would be paid and both parties satisfied.