Most people think about getting a reverse mortgage for the benefit of not having to make any more mortgage payments, and that is certainly the case for many people utilizing a reverse mortgage. However, I am here to tell you that you can certainly make mortgage payments with a reverse mortgage. Which is why I call it a payment optional mortgage.
You might ask yourself, why would I want to make mortgage payments if I'm not required to make mortgage payments? Well, there are a few advantages of making payments with a reverse mortgage that you don’t necessarily get with a traditional mortgage. So let me explain.
First, by making payments you reduce the loan balance. This advantage is no different than most other mortgages. However, with a reverse mortgage by making payments, this is not only reducing the loan balance, but this is also reducing the future mortgage interest and mortgage insurance that is charged in the future as these are assessed on the balance. By doing this, you are also preserving and protecting the equity in the home as you will ultimately owe less in the future.
Secondly, and potentially more importantly, is the effect on the line of credit (LOC). There are both fixed rate and adjustable-rate options with reverse mortgages. If you choose the adjustable-rate option, you will automatically have a LOC with your home equity conversion mortgage (HECM). When you make payments on the HECM, you will not only get the benefit of paying down your balance, but you will also get the secondary benefit of adding funds to your available LOC. By nature of the HECM, your LOC is providing you access to a portion of your home equity. Therefore, by making payments, you are giving yourself additional funds in your LOC. This is a dollar-for-dollar calculation. If you make a payment of $1,000, then your loan balance will go down by $1,000 and your available LOC will increase by $1,000. This is unlike a traditional mortgage because when you make payments on a traditional mortgage, you might pay the loan balance down, but you typically have no way of pulling the money back out in the future. This is one of the main reasons why it is simply more beneficial to go into a reverse mortgage versus a traditional mortgage at an earlier age, even if you are still able to make mortgage payments. This is also a reason to get into a reverse mortgage sooner versus later to allow the LOC to grow and grow over a longer period of time.
Moreover, the available funds in the LOC also grow. Which means, if you make any payments, the money you pay back to your loan balance will add to your available funds in the LOC but now those funds in the LOC are also growing as well. This ultimately means that you will have more access to more funds in the future if you ever want, or need, to tap into your equity. This is a bit of a hidden secret of the HECM. The LOC is also guaranteed to grow (as long as you meet the terms of the loan) because the LOC is growing at the interest rate plus 0.5%, it is not tied to your home appreciation rate. So, if the interest rate is 7.0% as an example, the funds in the LOC are growing at 7.5%. Now for the icing on top…because this is a loan, any money that you take out of the LOC is not taxed. These funds are not considered income and therefore you do not need to pay any income taxes on the funds and the money does not impact your overall tax bracket. (You always need to pay property taxes).
Lastly, there could be some potential tax benefits for making payments as well. Since mortgage interest is generally tax deductible in the year it is paid (this is not tax advice), if you make payments, there is a possibility that you can also get a tax benefit by making payments with a reverse mortgage. You must consult your tax advisor on this, but the reverse mortgage gives you the option and the flexibility to not make any payments at all, or to make payments of any amount, in any increment, and at any time you want. This concept of bundling payments can result in a bundling of tax deductions as well.
