Make payments with a reverse mortgage?

Most homeowners who obtain a reverse mortgage do it for one primary reason: to eliminate the required monthly principal and interest mortgage payment. And that makes perfect sense.

For retirees living on a fixed income, removing a large monthly obligation can dramatically improve cash flow, reduce stress and create more flexibility during retirement. In fact, that payment elimination feature is one of the biggest reasons the federally insured Home Equity Conversion Mortgage (HECM) has become such a powerful retirement planning tool.

But here’s what many homeowners never realize: The most common reverse mortgage product, the adjustable-rate HECM, has multiple advantages when making payments. Not required payments, but VOLUNTARY payments.

The hidden flexibility of the HECM

Most people assume a reverse mortgage works like a one-way street: once the loan balance starts growing, there’s no turning back. But that’s not true.

With an adjustable-rate HECM, borrowers can make what are known as “partial prepayments” at any time without penalty. And if those payments are made consistently, using the same interest rate, over the same time period, the reverse mortgage will amortize very similarly to a traditional forward mortgage. In other words, the loan balance would shrink instead of grow.

But unlike a traditional mortgage, the HECM offers two enormous advantages that many homeowners and even financial professionals overlook.

1. Every payment increases liquidity

This is where the HECM becomes truly unique. When borrowers make payments toward an adjustable-rate HECM, three things generally happen simultaneously:

• The loan balance decreases 
• Home equity increases 
• The available line of credit increases dollar-for-dollar 

That last point is critical. With a traditional mortgage, payments simply reduce debt. The money is gone. There is no future access to it unless the homeowner refinances or applies for a new loan.

With the adjustable-rate HECM, voluntary prepayments restore borrowing capacity. That means liquidity increases every time a payment is made. And for retirees, liquidity matters. Emergencies happen. Healthcare costs rise. Investment markets fluctuate. Having access to available funds later in retirement can be incredibly valuable.

Unlike many traditional home equity lines, the HECM line of credit cannot be frozen or reduced because of declining home values, as long as borrower obligations are met.

2. Payments are optional

With a traditional mortgage, stopping payments creates immediate risk. Miss enough payments and the home will be lost to foreclosure.

With a HECM, voluntary payments remain exactly that: voluntary. There is no required monthly principal and interest payment schedule forcing the borrower into a rigid obligation. That flexibility can be life-changing during retirement because income and expenses rarely move in straight lines.

A different way to think about home equity

This doesn’t mean every borrower should make monthly payments on a reverse mortgage. In many cases, eliminating the payment entirely is the right decision. 

However, sophisticated homeowners and financial planners are increasingly recognizing something important: The adjustable-rate HECM is not just a “last resort” loan. Rather, it is a flexible financial planning tool. 

Some homeowners will “pool” or “stack” voluntary payments into one calendar year when the borrower wishes to itemize deductions. Others will take their required minimum distribution (RMD) and make a large windfall payment to create an offsetting 1098 deduction. 

When used strategically, it can provide both payment relief today and liquidity growth for tomorrow, a combination that traditional mortgages simply cannot match.

Dan Hultquist is the Co-Founder of REVERSE plus.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.