One of the biggest benefits to the home equity conversion mortgage program is that, unlike conventional mortgages or home equity loans or lines of credit, you are not required to make monthly payments toward the balance of the loan.
The federally-insured HECM program requires that loans be repaid when the borrower dies, leaves the home, or fails to follow certain requirements relating to home maintenance or property tax and homeowners insurance payments.
But that doesn’t mean that you can’t make repayments during the life of the loan. Unlike other loans, there is no prepayment penalty for HECMs, so you can make payments on your reverse mortgage without fear of incurring additional fees.
Though it’s not a requirement, some borrowers find making monthly payments toward their loan balance can serve as a big financial benefit.
PROS
Reduce the overall amount of interest you’ll owe
Reverse mortgages come with either a fixed or variable interest rate, and as the interest on your loan compounds, your loan balance grows. Making repayments during the life of your loan can help reduce the overall amount of interest you will owe once the reverse mortgage comes due.
Please note that if you choose to make a payment, that money is applied to different parts of your loan balance in a specific order. Check with your loan servicer to get more information on how partial prepayments are applied to your balance.
Lower your annual mortgage insurance premium
In addition to the one-time mortgage insurance premium (MIP) borrowers pay when they take out a reverse mortgage, there’s also an annual MIP of 1.25% of your outstanding loan balance. If you make repayments and lower the amount you owe on your reverse mortgage, then your mortgage insurance premium will decrease.
You can deduct interest payments on taxes
The amount of your loan repayment that goes toward interest can be deducted on your taxes. Consult a tax advisor if you’re interested in pursuing this route.
Leave more home equity for your heirs
If you find yourself able to make payments on your outstanding loan balance and wish to do so, this will lower the amount you or your heirs will owe once the loan becomes due.
CONS
You don’t have to
The HECM is unlike other loans because borrowers don’t have to make payments for the life of the loan. This frees up monthly cash flow for other uses and takes away the stress and responsibility of monthly mortgage payments.
Prepayment may not be your best financial option
If you are looking to improve your cashflow situation for a short amount of time, a HECM may not be your best option because of the upfront costs associated with taking out a reverse mortgage. If your plan is to repay the loan in the near term, you may want to explore other options.
You might need repayment funds down the road
While you may have “extra” cash flow for a couple of months, whether it’s unexpected income from other sources or retirement portfolio proceeds, there may be times when your expenses are higher than expected. Rather than spend your “extra” money on repayments, you can save it to cover other expenses you may encounter.
Are you considering a reverse mortgage and would you like to see how much you could be eligible to borrow? Calculate the loan amount you could qualify for using our reverse mortgage calculator. Any other questions about repaying your loan? Contact one of our pre-screened reverse mortgage lenders today!
