Most seniors who receive a Home Equity Conversion Mortgage (HECM) intend to make payments only when the loan comes due. After all, one of the primary benefits of a HECM (more commonly referred to as a reverse mortgage) is that you don’t need to start making payments immediately as long as you still adhere to obligations of the loan, such as maintaining your home, paying property taxes, and keeping homeowners’ insurance. But as seniors with different goals discover the utility of a HECM, many choose to pay back the loan sooner rather than later. Not only is it possible to pay back a reverse mortgage early, but it is also favorable in many scenarios. Let’s explore the pros and cons of reverse mortgage prepayment as well as a few of the common strategies for payment that many seniors employ.
The Pros and Cons of Paying Early
To pay or not to pay? Or, the more accurate question would be – when is it most optimal to pay? Depending on your current financial situation, outstanding debts, and numerous other factors, it might be preferable to wait and pay off the reverse mortgage when it comes due. On the other hand, it could be better to simply wait and pay when needed. Below are a few of the pros and cons of early payment.
Pros of Prepayment
Unlike some loans and complicated financial arrangements, there are no prepayment penalties associated with paying off a reverse mortgage earlier than usual. Basically, making payments on a reverse mortgage before the loan actually comes due doesn’t have any added downsides other than the fact that you won’t have as much money in the short term. However, the benefits of making payments in advance are quite clear. For example, if you can pay off the balance of the loan before it comes due on its own, you will be able to leave your home to your heirs free and clear – or at least, with a much smaller debt than existed at the start. This can give them more money if they choose to sell the home, or a much lower cost if they wish to purchase it.
Reasons to Wait
As previously mentioned, many people choose to get a reverse mortgage because you don’t have to make monthly payments. After all, one of the most unique benefits of a reverse mortgage is the fact that you don’t need to make immediate payments. Until the loan finally comes due, you have the freedom to make as many or as few payments as you wish – and you can pay as little or as much as you want when you do make payments. Some people choose to defer their reverse mortgage debt until the loan comes due because they prefer to give other assets time to grow. They may be able to get a reverse mortgage to pay off their existing mortgage or perhaps solve issues with medical bills. From here, this may allow them to leave existing assets untouched so that they can continue growing at a good rate. Thus, deferring payment on a reverse mortgage so that other assets can grow is a valid reason to wait and pay later on.
Common Prepayment Strategies
When it comes to paying back any serious debt, proper budgeting is essential. If you do choose to make payments on your reverse mortgage, it is almost always a good idea to make a plan for what you want to pay and when you should pay it. Otherwise, you may not end up accomplishing your prepayment goals. Staying organized and disciplined are both essential parts of a money-managing mindset, but sometimes, it also helps to have specific goals and reasons for backing up your payment strategy. Here are a couple of the most common ways to handle prepaying a reverse mortgage.
Prevent Debt from Growing
One of the most common reasons why people choose to make early payments on a reverse mortgage is to prevent the balance on the loan from growing. Like a traditional mortgage, reverse mortgages involve an interest rate that will increase the amount of debt you owe as time goes on. Until the loan is paid off and finally settled, the balance will continue to accrue in accordance with its interest rate. Therefore, one thing that many borrowers do – rather than fully paying off their reverse mortgage – is to simply pay the interest each month. By doing this, you will prevent the loan from amortizing negatively. Thus, when the time comes to fully pay off the loan, you will have saved yourself from paying a lot more money in the long run.
Treat the Reverse Mortgage as a Refinance
In some cases, borrowers may be able to receive a reverse mortgage even if they can’t get a traditional refinance. Even with poor credit scores and other issues, some borrowers will still be able to qualify for a reverse mortgage. At this time, reverse mortgage borrowers do not need to reach a strict credit score to qualify for the program. However, credit history is still evaluated and other tools such as a Life Expectancy Set Aside may be employed to address credit problems. Overall, some people may still prefer to treat a HECM like a refinance with a bit more flexibility. Because the reverse mortgage does not require constant monthly payments, missing a month or two isn’t penalized. Thus, treating the reverse mortgage like a normal refinance and adjusting your payment schedule as you see fit is a common way that some borrowers choose to handle the loan.