The reverse mortgage has plenty of perks that distinguish it from an ordinary loan. While many borrowers appreciate the fact that it is a non-recourse loan that does not require monthly payments, some borrowers still choose to make monthly contributions. Whatever they choose, every borrower is still responsible for paying property taxes, homeowners insurance, and home maintenance costs.
What are the pros and cons of making monthly payments on a reverse mortgage? Under what circumstances does this make sense? We explain how a reverse mortgage works and why you might want to start paying back your debt earlier.
Pay the Interest to Prevent the Debt from Growing
Under normal circumstances, interest will begin to accumulate on a reverse mortgage after you begin receiving funds – keep in mind that this process will vary depending on which type of reverse mortgage you receive. To prevent the balance on the loan from accumulating interest, you can choose to pay the interest over time. For example, let’s say that you have a reverse mortgage for $100,000 and you decide to make interest payments each month in order to prevent the balance from increasing. That interest payment will likely be less expensive than existing monthly mortgage payments. Before committing to a reverse mortgage for this reason, be sure to double check with a financial advisor to determine whether it will be feasible for your particular situation.
Having Trouble Qualifying to Refinance Your Existing Mortgage?
If you’re having issues qualifying to refinance your existing mortgage, a reverse mortgage may be an option for you. Those with poor credit scores will be happy to know that, at this time, the reverse mortgage process does not have a strict credit score requirement. However, keep in mind that all borrowers must undergo Financial Assessment (a systematic analysis of a borrower’s credit history, cash flow/residual income, and other relevant factors) in order to determine if there are additional requirements. In some cases, borrowers may be required to leave a portion of their funds in a Life Expectancy Set Aside (LESA) account, which will be used to pay for taxes, insurance, and home maintenance expenses.
In any case, since monthly payments are not required for a reverse mortgage, this may be a better alternative than refinancing a regular mortgage. For borrowers with inconsistent income who may need to skip a month every now and then, this is especially useful. You can pay off the loan at your own pace. But be sure to keep up to date on necessities like taxes, insurance, and maintenance expenses.
Delay and Supplement Social Security
If you still have a regular mortgage, getting a reverse mortgage will eliminate your existing monthly mortgage payments. You can use this for a variety of purposes, including delaying your Social Security payments and potentially increasing the amount you may receive. By making a simple monthly interest and principal payment – which is usually much smaller than a regular mortgage payment should be – you could potentially save hundreds of dollars. You could put those savings toward your daily expenses instead. If those extra funds make enough of an impact, you may be able to delay Social Security for your benefit, while simultaneously preventing the balance on your reverse mortgage from growing substantially.
Leave Your Home to Your Heirs Without Debt
You will remain the owner of your home even after acquiring a reverse mortgage. However, most people choose to sell their home to pay off their reverse mortgage at the end of the loan’s life cycle. If the home sells for more than what is owed, you or your heirs keep the remaining money from the sale. But, if your heirs would like to keep the home after the mortgage has run its course, they can either refinance 95 percent of the home’s value or the balance of the loan – whichever figure is lower. By making continuous payments while the reverse mortgage is still active, you may be able to substantially reduce this balance for the sake of your heirs. This will allow them to purchase the home for a much lower price or give them more money from the sale of the home after the balance is paid.
Although making monthly payments is still an option with the reverse mortgage program, many borrowers prefer not to make these kinds of payments. After all, eliminating existing monthly payments is one of the primary perks of the program. However, as demonstrated here, there are plenty of advantages that reverse mortgages offer even if you do choose to continue making payments.