This payment strategy – paying only the interest for 11 months followed by a large payment in month 12 – is thus doable. I found the $2,456 in the example very easily using the extra payments spreadsheet on my Web site, and you can too.

BUT: the payment to principal at year-end is larger than the difference between the fully amortizing and the interest-only payments over the year. The monthly payment difference of $199, when multiplied by 12, equals $2,388. This is the sum of the principal payments you would have made if you had not selected the interest-only option. It is $68 less than the $2,456 payment required at year-end to make up for the absence of monthly principal payments. The $68 is the penalty for delaying the principal reduction.

You might well decide that this is a small price to pay for the convenience of being better able to match your payments to your income. The greater flexibility, however, means less discipline. Without the IO option, you must make the fully amortizing monthly payment, but the year-end payment of principal when you take an IO is voluntary. It is going to be so easy to spend that money differently!

Are Borrowers Protected On FHA Reverse Mortgages?

"I fear that some elderly homeowners who take out FHA reverse mortgages will not receive all the payments to which they are entitled. FHA insurance protects the lender, not the borrower. When you consider that payments to the borrower must continue for life – which can be 40 years or more – there is a distinct possibility that some lenders will just not be there to complete the payments. They will profit from the shorter-lived borrowers, then default on those who live too long."

Not so, there is no way this will happen.

The FHA reverse mortgage program has been growing in popularity, and the protection it provides the elderly homeowners who participate is a major reason. They have the right to live in their house until they die or voluntarily move out, and any annuities or draws against their credit lines that they are due are certain to be paid.

It is true that the FHA insurance, in the reverse mortgage program as well as in all other FHA programs, protects the lender rather than the borrower. In the event that the amount owed by the borrower exceeds the value of the property, the loss to the lender will be covered by FHA. But under the reverse mortgage program, any payments due the borrower are also protected. The Department of Housing and Urban Development (HUD) has a legal obligation to make such payments in the event that the lender does not.

When the reverse mortgage loan balance gets to 98 percent or more of the "maximum claim amount," which is the maximum amount that can be collected, lenders are allowed to assign the loan to HUD and be paid the balance. HUD then assumes responsibility for making any additional payments that are due the borrower. HUD will also take over responsibility if, for some reason, the lender cannot make the required payments.

The upshot is that borrowers are fully protected. The only possible blip in their lives arises from the transfer of servicing from the original lender to a servicer working for HUD, and that should be inconsequential.