One of the things that people tend to not understand about a reverse mortgage is that it is much like any home loan you may have taken out in your life. The most visible difference is that you have a choice to make a payment* versus having to make a required payment. In a traditional refinance, you have to make monthly payments of a specific amount every month until the loan amount is paid off. In a reverse mortgage, you have a choice. You can make that mortgage payment or you can use that money however you want.*
That is wonderful, but what if you wanted to make a payment to your loan before it became due? This is a great question, and it is asked daily by many clients. The easiest way to really discuss this is to talk about it based upon the product that you have taken out.
Before we go into each loan product, if you have a reverse mortgage, you should be getting a monthly statement from your loan servicer that shows you how much you owe. The loan servicer is the company that you send your loan payments to – whenever you decide to pay them. Since each servicing company is different, it is best to contact your servicing company and to ask them what the process is for sending in your payment.
With a fixed rate loan you can only take your proceeds in a lump sum, so you have a fixed interest rate on the loan amount. A fixed interest rate means the interest rate will remain the same then entire length of the loan. As long as the amount you are paying is more than the interest that is accruing every month, you will slowly eat away at the loan amount. As an example, Josh and Lee have been married for about 40 years. They are both 68 years of age and have decided to get a reverse mortgage after getting all the facts from a licensed expert from Florida. Their home in Tampa appraises for around $300,000, and they still owe approximately $50,000 on their mortgage. They qualify for a reverse mortgage of approximately $170,000, but before taking out the reverse mortgage, their current mortgage balance has to be paid off, leaving them around $120,000. Let’s say the interest rate was 3%. Because it is a fixed rate loan, the $120,000 starts to accrue interest monthly at a fixed rate of 3% until the loan comes due, or is paid off early. The interest rate for their loan will not change even if the national rate does change.
With an adjustable rate loan, you have a multitude of options of how to get the reverse mortgage proceeds. The interest rate for this type of loan changes. For instance, if you have a line of credit, the interest rate on the amount of money you take out one month may differ from the interest rate on money you take out another month. It just depends on what the interest rate is at the time you withdraw some of your proceeds. So when you are making payments to the loan, definitely pay attention to the interest rates on monies that have been taken out.
Benefits of Paying Down Your Reverse Mortgage
In the above scenario with Josh and Lee, paying down their loan balance has huge net benefits. It will reduce the amount of debt that will be owed when the loan does finally comes due. In some cases, if the amount is paid off early, then the mortgage itself is closed out, very much like a traditional mortgage.
With everything said above, it is highly important to remember that, whether you decide to make payments or not, you are still responsible for paying your property taxes, homeowners insurance, and home maintenance costs.
*Homeowner is still responsible for taxes, insurance and property maintenance.