Making Reverse Mortgage Payments: How It Works

Reverse mortgages are designed to help older homeowners continue living in their homes in their later years by letting them convert their home equity into income. Instead of the borrower making payments to the mortgage 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 making payments on a reverse mortgage may be worthwhile for borrowers who can afford them and want to maintain as much equity as possible.

Can I Make Payments on a Reverse Mortgage?

It’s optional, but you can make payments on a reverse mortgage. 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 home 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 pay for property 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.

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.

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.

Benefits of Making Reverse Monthly Mortgage Payments

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.

Prevent your debt from growing

A major concern for older Americans is not having saved enough to live comfortably in retirement.

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.

To leave your home to heirs with more equity

Making reverse mortgage 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 keep the home by repaying the loan with cash or by refinancing to a standard mortgage.

How To Pay Off a Reverse Mortgage Early

Reverse mortgages typically aren’t paid back until the borrower no longer lives in the home — but you also have options for paying it off early to reduce your debt. Here are some ways to pay off a reverse mortgage early.

Pay off the remaining balance

One option is to pay back in cash the principal on your reverse mortgage. If you owe more than the home is worth, you only need to pay 95% of the home’s appraised value — FHA mortgage insurance will reimburse the lender for the rest.

Sell the home

Another option is to sell your home yourself and use the money to pay off your reverse mortgage.

Pay off the mortgage with another loan

You also could refinance your reverse mortgage with a traditional mortgage. With this option, you’ll no longer receive payments and will instead need to resume making monthly payments to your lender. Just keep in mind that taking out a new loan will require you to meet credit and income requirements, as well as pay closing costs.

Refinance the reverse mortgage

You can also pay off your reverse mortgage by refinancing it into another reverse mortgage. This could be a good move if interest rates have dropped, and you want to save on interest in your reverse mortgage. If the value of your home has increased, then refinancing your reverse mortgage would help you hang onto more equity. Just remember you have to pay closing costs and fees.

Your lender may require you to meet what’s called the 5-5 rule, which states the principal of the new reverse mortgage should be at least five times as much as the closing costs, and the proceeds from the loan must be more than 5% of the amount being refinanced.

Is Making Monthly Payments Right for You?

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.

FAQ: Making Reverse Mortgage Payments

Here are answers to common questions about making reverse mortgage monthly payments.

The Bottom Line on Making Reverse Mortgage Payments

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.

Rory Arnold contributed to the reporting of this article.