The answer to this question would be a no. There are no early repayments or prepayment penalties on a reverse mortgage. But there are both hard and soft pre payments or early payment penalties that apply on a conventional mortgage.
In order to discourage the mortgage holders from paying off or refinancing their loans early, most of the lenders include a prepayment or early repayment clause in contracts.
Why do lenders add early repayment penalty clause in agreements?
Interest income is one the main revenue source for mortgage lenders. Majority of the mortgage lenders don’t mind extra payments. When a borrower pays over 20% of the balance amount in less then twelve months, obviously the future income of the lender is threatened. But by including an early repayment penalty clause, the borrower won’t opt for prepayment as it would be more expensive. Majority of the companies or lender prepayments disappear or decrease over a period of time, as the clause will be limited to a particular time period.
Why the repayment or prepayment penalties aren’t applied on reverse mortgage?
Generally the repayment penalty would defeat the purpose of reverse mortgage. As reverse mortgage grants the house owners to access the equity without repayment. Most of the borrowers would gain nothing from pre payment or early payments. The home owners would have applied for reverse mortgage to earn monthly payment from lenders without selling their house.
There are numerous types of reverse mortgages loans offered by lenders like fixed rate and variable rate loans. Fixed rate mortgage loans have fixed interest rate and rate remains constant throughout the tenure of the loan. But the payment option is limited to a lump sum payment. Variable rate loans have adjustable interest rate tied to major financial index, which adjusts through the life of the loan. There are various payment options like tenure, lump sum or term based payments.
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