Reverse mortgages are designed to help older homeowners continue living in their homes in their later years by letting them tap into their equity and convert it into cash. Instead of the borrower making payments to the lender that reduce the balance owed and increase their equity, the lender pays the borrower — increasing the amount owed and reducing their equity.
These loans are designed so that borrowers don’t have to make a monthly payment, but reverse mortgage payments may be worthwhile for people who can afford them and want to maintain as much equity as possible.
Here’s what to know about making reverse mortgage payments:
- Can I Make Payments on a Reverse Mortgage?
- Benefits of Making Reverse Mortgage Monthly Payments
- Is Making Monthly Payments Right for You?
- Reverse Mortgage Payment FAQ
- The Bottom Line on Making Reverse Mortgage Payments
You can make reverse mortgage monthly payments, but it’s optional. Here’s what that means.
A home equity conversion mortgage, the most common type of reverse mortgage, is designed to allow homeowners ages 62 and over to convert the equity in their primary residence into cash. They can take out that cash as a lump sum, a series of regular payments, or a line of credit to use as needed.
The amount that homeowners can borrow using a reverse mortgage is determined by their equity, which is the difference between what the home is worth and what they owe on it. Homeowners can’t borrow all of their equity with a reverse mortgage, and in some cases must set aside funds to cover taxes and homeowners insurance.
To qualify for a reverse mortgage, you typically must own the property outright or have paid down considerably the amount owed on it. There’s no hard-and-fast rule, but homeowners usually need at least 50% equity to get a reverse mortgage. You also need to show you can afford to keep the home in good condition, pay property taxes, and maintain homeowners insurance coverage.
Payments on a reverse mortgage are optional until the borrower no longer lives in the home as their primary residence — usually because they’ve moved out, sold the home, or died. Then the loan is due in full, and usually is paid by selling the home or refinancing to a standard mortgage.
There’s no reason you can’t make payments on a reverse mortgage before it comes due, and have that amount applied to what you owe.
With reverse mortgages designed to provide income for older homeowners in their later years, making monthly payments may seem counterintuitive. But there are reasons why it makes sense for reverse mortgage borrowers to make monthly payments.
A major concern for older Americans is not having saved enough to live comfortably in retirement. A modern retirement survey indicates 29% of seniors expect to outlive their money.
The cash that borrowers receive from a reverse mortgage increases their debt and reduces their equity. Making payments is one way to slow or reverse that equity drain, either to make it last longer or to reduce the amount owed when the loan comes due.
A common strategy is making interest-only payments. Such payments would be more affordable and keep the loan balance from increasing.
A more common and less restrictive way to borrow equity is a cash-out refinance. But like a standard mortgage, cash-out refinances have income and credit requirements that may be out of reach for older homeowners.
Because a reverse mortgage is designed to convert equity into cash with the home itself as collateral, there generally are no income or credit requirements for borrowers. That makes reverse mortgages more viable for older homeowners.
Making reverse mortgage monthly payments and reducing the debt owed can make it easier to leave your home to your children or other heirs.
The less that’s owed on the home when the reverse mortgage comes due, the easier it will be to repay the loan with cash or by refinancing to a standard mortgage — and keep the home.
Most reverse mortgages are repaid with the heirs selling the home because the loan comes due nearly right away, says Joshua Westreich, branch manager at U.S. Mortgage of New Jersey in Glen Rock, New Jersey. Making monthly payments on a reverse mortgage allows borrowers to reduce their debt and be more certain they can leave something of value to their family.
Although reverse mortgage payments will reduce your overall debt, it may not make sense for everyone.
If you plan on keeping your home for yourself or your heirs, reverse mortgage payments make sense. Making payments will reduce the amount you owe, which means it’ll be easier to repay the reverse mortgage when the loan comes due.
If you are OK with selling your home to repay the reverse mortgage and having less left over afterward for yourself or your heirs, then making payments is unnecessary.
“Most people in a reverse (mortgage) are using it to be able to afford to live,” Westreich says. “Making an unnecessary payment would hurt their quality of life.”
Reverse mortgages can be tricky to understand. Here are answers to a few common questions about making reverse mortgage monthly payments.
Yes. Anyone can pay off a reverse mortgage, including a living spouse or the heirs to the property. However, the reverse mortgage note becomes due almost immediately after the borrower stops living in the home.
Typically, paying off a reverse mortgage is done through the sale of the home. The proceeds are applied to the debt, and then any remaining money goes to the owner or heir. If qualified, you also can refinance to a traditional mortgage, take out a personal loan, or pay cash to retire a reverse mortgage.
A reverse mortgage comes due in full when the home is sold, the borrower no longer lives in the home as their primary residence, fails to pay property taxes or homeowners insurance premiums, or dies.
While reverse mortgages can provide a much-needed source of cash for older homeowners, they do so by reducing home equity. Borrowers who wish to shore up their equity may do so — even when no payments are required. That can make repaying the loan more affordable, and it will be easier to pass on the home to family or more likely for the borrower to have money left over after a sale.