A reverse mortgage is a home loan available to senior homeowners at least 62 years old. It is different from a traditional mortgage on two counts: the borrower does not need good credit or income to qualify nor do they have to make any loan payments while they remain living in the house. The loan is extremely flexible in both how the money can be taken out as well as repaid. You may choose to make interest or principal payments at any time.
What Is the Interest?
You can choose to take out a reverse mortgage as a fixed-rate or adjustable-rate loan, on a lump sum, monthly payments, line of credit or a combination of forms. Unlike the interest on a standard loan, which is reduced each month as the principal is reduced, interest on a reverse mortgage generally accrues on the principal because it is not paid. This results in increasingly higher interest payments throughout the life of the loan.
When Is the Interest Usually Paid?
Typically, because a borrower takes out a reverse mortgage specifically because it requires no payments, both interest and principal on a reverse mortgage are not paid until the end of the loan -- when the homeowner dies, sells the home or moves away for 12 months. The usual means for payment is through the sale of the property.
What Happens if You Do Pay Interest?
If you would like to make interest payments on a reverse mortgage, you have many ways to do it. You can choose to make a regular monthly payment for a set amount or for varying amounts or you can make payments irregularly – as often or as seldom as you like. You can allow some interest to accumulate or none at all. Because it is mortgage interest, your payments will be tax deductible, just like the mortgage interest payments you make on a standard loan.
The Best Choice for Payment
You can make interest payments on any type of reverse mortgage: fixed-rate, adjustable rate, lump sum, monthly payment or line of credit. If you think you might have extra money from time to time that would otherwise go toward the interest payments, however, consider taking out the reverse mortgage as a line of credit. This is a product that allows you to take out as little or as much of the credit line as you like. During periods of time when you have extra money, you could leave the line of credit balance alone. The advantage to doing this is that any unused portion of a line of credit grows at an annual rate of one half of one percent above the rate you pay on the used portion of the line. So by deferring use of the line, you actually increase it. Also, like a standard home equity line, any principal you choose to repay will still be available to you to take out in the future.
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.