Reverse mortgages are sometimes framed as a product that enables homeowners 62 and over to borrow money against their house that they never have to pay back. This is not the case. A reverse mortgage is a loan. Specifically, it is a home equity loan with unique terms. And like any loan, it will eventually have to be repaid.
The main difference between a reverse mortgage loan and any other loan is the repayment terms. As long as the borrower is living in the house and meets specific reverse mortgage requirements, they do not have to make payments on the loan. However, the loan becomes due if the borrower dies, moves out, or fails to meet the requirements. In this article, we’ll explain your options when a reverse mortgage becomes due. We’ll also discuss common ways to repay a reverse mortgage early. Read on to find out what you need to know about paying back a reverse mortgage and whether or not a reverse mortgage is a good idea for you.
How does a reverse mortgage work?
Reverse mortgages are insured by the Federal Housing Administration (FHA) under the auspices of the U.S. Department of Housing and Urban Development (HUD). They are specifically designed to allow older homeowners to borrow money while not increasing their financial burden in later years.
The most common type of reverse mortgage is called a home equity conversion mortgage (HECM). Some lenders will offer proprietary reverse mortgages or jumbo loans. The interest rate charged can be fixed rate or adjustable, depending on the loan type.
Like a traditional home equity loan, homeowners convert home equity to cash. Unlike a home equity loan, there are no monthly payments to be made. Hence the name reverse mortgage, a mortgage that pays you instead of the other way around.
Reverse mortgage lenders are able to offer such terms because the FHA insurance provides certain protections and standards for both lenders and borrowers alike.
Depending on the type of reverse mortgage, the cash can be distributed as a lump sum, installment payments, a line of credit similar to a home equity line of credit (HELOC), or a combination of any of these. To qualify for a reverse mortgage, you must first build up significant equity in your home or own it outright. If you are carrying a mortgage balance, it will first need to be paid off with the reverse mortgage before you receive the remainder of the funds.
Other qualification criteria include:
- You must be 62 or older
- You must continue living in the home as your primary residence and maintain the property
- You must continue to pay homeowners insurance, property taxes and HOA fees when applicable
- You must complete a counseling session with a HUD-Certified Housing Counselor
Funds from a reverse mortgage can be used for whatever the homeowner wishes, including making home repairs. Under the installment loan option, borrowers can continue to receive payments as long as reverse mortgage requirements are met. This could feasibly lead to a situation where the loan balance is higher than the house's value.
However, because of the FHA insurance, the borrower or their heirs will never owe more than 95% of the house's appraised value as the FHA will pay the bank any additional balance.
How to get out of a reverse mortgage early
There are several reasons why you may want to get out of a reverse mortgage early. It is possible that you no longer need the funds, or perhaps you want to leave your house to your heirs without the financial burden of having to pay off the loan. It’s also possible someone has moved in who is not on the loan and you don’t want them to get kicked out if you leave the property or die.
Regardless of the intention, there are a few ways to get out of a reverse mortgage while you are still in the house.
Utilize the right of rescission
This option is only relevant in the short term. You have three days after closing the reverse mortgage to cancel the entire thing without incurring fees or penalties. Then, the lender will have 20 days to return any already charged servicing fees and closing costs. If you get buyer’s remorse and decide to go this route, you will need to notify the lender in writing.
Repay the loan
It may seem a no-brainer, but you can always just pay off your reverse mortgage balance if you are able. You must pay back the entire loan amount plus all current interest charges. To do this, you could opt for a lump sum, or pay back in installments as you are able. But once it is paid, no more reverse mortgage.
Refinance into a conventional mortgage
You can always refinance the reverse mortgage into a traditional mortgage. This means you will be back to owing this money on the house and making monthly mortgage payments as you used to do. However, if you wish to leave the home to your heirs, you will be reducing or eliminating the amount they will owe to keep it. The customary origination fee and closing costs related to traditional mortgage refinancing will apply and need to be paid upfront, so make sure you consult with your lender as to what these will be.
When is a reverse mortgage due?
The repayment of a reverse mortgage is triggered when the final surviving co-borrower or eligible non-borrowing spouse passes away, sells the home, or permanently relocates, to a nursing home or assisted living facility for example. Additionally, a reverse mortgage may also become due if the borrower is still living in the house but fails to live up to the reverse mortgage requirements.
If the borrower or heirs want to retain the home, the loan balance will have to be paid. It's crucial to note here that the heirs are not obligated to settle the outstanding balance of the loan. If the heirs do not wish or can’t afford to keep the home, the bank will most likely sell it to pay off the reverse mortgage balance. If the balance exceeds the home’s value, the FHA insurance will make up the difference.
How do you pay back a reverse mortgage?
If the primary borrower or their heirs wish to retain the house they have two options. Either pay back the reverse mortgage with cash on hand, or refinance the reverse mortgage into a new loan and make monthly payments until the balance is paid off. In either situation, if the reverse mortgage balance exceeds the appraised value of the home, heirs will not have to pay more than 95% of the appraised value.
If the borrower or heirs do not wish to keep the house, they can sell the house to pay off the reverse mortgage from the sales proceeds and pocket any leftover funds.
As a last resort, the borrower can sign over the deed to the lender in order to avoid foreclosure. This effectively lets them walk away from the loan and makes selling the house the lender’s problem.
Summary of Money’s How Do You Pay Back A Reverse Mortgage?
Reverse mortgages can be a great way for Americans 62 and older to access supplemental retirement income to make things easier in their autumn years. However, it is essential reverse mortgage borrowers and family members who may be affected know all the facts and the ins and outs before proceeding.
A reverse mortgage must always be paid back if you want to keep the home. Either by the original borrower or their heirs. If you do not wish to keep the home, you can sell it and use the proceeds to pay off the reverse mortgage balance.