According to ReverseMortgageDaily, some reverse mortgage borrowers have begun to deliberately pay down their reverse mortgages, sometimes with the intention of paying them off completely. While countering the loan’s negative amortization is admirable, however, this strategy raises questions about whether these borrowers might be better served by other types of loans.
Reverse mortgages are inherently negatively amortizing, which means that interest and principal accrue indefinitely until the loan is retired. Unless the value of one’s home appreciated at 5%+ per year, a reverse mortgage borrower would probably find himself with very little remaining home equity after as little as 10 years. Naturally, the only way to avoid this outcome – other than obtaining a smaller loan – is to make payments on the reverse mortgage much like you would with a conventional mortgage.
However, this goes against the very nature of the reverse mortgage, which were designed to bring financial security to retired (i.e. low income) borrowers. Because there is a serious risk that one day the loan will become negative equity (the loan balance will exceed the value of the home), the FHA charges borrowers a 1.25% annual insurance premium. By repaying the loan, borrowers are essentially alleviating lenders/FHA of this risk while still being charged for it.
I suppose one could argue that it’s nice to have the flexibility of not having to repay the reverse mortgage, in the event of financial hardship or a simple change of heart. In other words, one could obtain a reverse mortgage with the purpose of repaying it, and either lower or cease such repayment as the circumstances of one’s life change. In this way, the borrower gets to have his cake and eat it too.
Still, it’s worth pointing out that a conventional mortgage and Home Equity Line of Credit (HELOC) will almost always be less expensive than a reverse mortgage, and you should look into either of these possibilities if your cash needs are short-term and you expect to be able to repay the loan. Then again, these types of conventional loans are becoming more difficult and more expensive to obtain, and a reverse mortgage might be the only viable option for certain borrowers.