I recently had an interesting question from a reverse mortgage borrower in Fountain Valley, CA. They asked, “Debbie, what if I want to make payments on the reverse mortgage?”
You sure can and depending upon your age and the type of reverse mortgage you have it could be a decent strategy for you.
None of the FHA HECM Reverse Mortgages have any prepayment penalties so no worries there.
If you have a fixed rate (closed-end) reverse mortgage and you make a payment you will reduce the amount of your next months Current Outstanding Loan Balance. Those prepaid funds are not available to be re-borrowed.
When you look at your reverse mortgage statement each month you will see a line item called “Current Outstanding Loan Balance”. This is the total of what you owe on that statement date. This amount is comprised of what you’ve borrowed plus the accrued interest, mortgage insurance, and service fees if any.
If you make a prepayment the lender will credit the prepayment in a certain order. That order is- First to the part of that loan balance that represents accrued mortgage insurance. Second - to that part of the loan balance that represents accrued servicing fees. Third - the that part of the loan balance representing accrued interest and lastly to that part of the loan balance that represents the principal balance. The net effect of this is that you will reduce the amount of your Current Outstanding Loan Balance.
If you have an Adjustable Reverse Mortgage - "6. BORROWER'S RIGHT TO PREPAY A Borrower has the right to pay the debt evidenced by this Note, in whole or in part, without charge or penalty. Any amount of debt prepaid will first be applied to reduce the principal balance of the Second Note described in Paragraph 11 of this Note and then to reduce the principal balance of this Note. All prepayments of the principal balance shall be applied by Lender as follows: First, to that portion of the principal balance representing aggregate payments for mortgage insurance premiums; Second, to that portion of the principal balance representing aggregate payments for servicing fees; Third, to that portion of the principal balance representing accrued interest due under the Note; and Fourth, to the remaining portion of the principal balance. A Borrower may specify whether a prepayment is to be credited to that portion of the principal balance representing monthly payments or the line of credit. If Borrower does not designate which portion of the principal balance is to be prepaid, Lender shall apply any partial prepayments to an existing line of credit or create a new line of credit." ~Quoted from the Adjustable HECM Promissory First Note.~
This means that on the adjustable reverse mortgage the funds you prepay are available to be withdrawn again. Hence the “open-ended” aspect of the loan. Take a look at a prior post of mine, the Perfect Retirement Loan, to see why this could be a good idea.
I hope that you understand my explanation and if not please feel free to give me a call at 951-283-2983 and we can discuss it. If you disagree with my interpretation of the meaning of the document, I'd love to hear from you too. Comment below and I will do my best to respond clearly.
By Deborah Nance
Your Local Southern California Reverse Mortgage Professional
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iReverse Home Loans, LLC, NMLS#810502 originates reverse mortgages in Alabama, Alaska, Arizona (MB-0919584), California, Colorado, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon (ML-5378), Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont (1164-MB), Virginia, Washington and Wisconsin.
Important Information: Reverse Mortgages are neither "endorsed" nor "approved" by the Federal Government. The FHA (Federal Housing Administration) provides certain insurance benefits for lenders and borrowers in connection with the lender’s HECM loans; the FHA does not make or originate loans. The owner(s) retain title to the property that is the subject of the reverse mortgage until the person sells or transfers the property and is therefore responsible for paying property taxes, insurance, maintenance and related taxes. Failing to pay these amounts or failure to maintain the condition of your property may cause the reverse mortgage loan to become due immediately. A reverse mortgage is a complex loan secured by your home. Whether such mortgage makes sense for you depends on your financial situation and needs. For these reasons, we strongly recommend that you consult with a qualified independent housing counselor, family members and other trusted advisers before making this decision. This website is not from HUD or FHA and was not approved by HUD or any government agency.