How Do You Pay Back A Reverse Mortgage?

Reverse mortgages are specifically meant for homeowners 62 and over, allowing them to access home equity without increasing their monthly debt burden. Like any loan, reverse mortgages eventually have to be repaid.

As long as the borrower lives in the house and meets specific reverse mortgage requirements, they do not have to make monthly payments. 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. Depending on the loan type, the interest rate charged can be fixed or adjustable.

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, a reverse mortgage is a mortgage that pays you instead of the other way around.

Reverse mortgage lenders can offer such terms because FHA insurance provides certain protections and standards for lenders and borrowers.

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 you wish, including making home repairs. Under the installment loan option, you can continue to receive payments as long as reverse mortgage requirements are met. This could 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 do you pay back a reverse mortgage?

If you or your heirs wish to retain the house, there are 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 home's appraised value, your heirs will not have to pay more than 95% of the appraised value.

If you or your heirs do not wish to keep the house, it can be sold, and the reverse mortgage can be repaid from the sales proceeds. Any leftover funds go to you or your estate. As a last resort, the home's deed can be signed over to the lender, at which point the debt is considered paid.

When is a reverse mortgage due?

Repayment of a reverse mortgage is triggered when you, your surviving co-borrower or your 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 you still live in the house but fail to meet the reverse mortgage requirements.

If you or your heirs want to retain the home, the loan balance must be paid. It's crucial to note here that your heirs are not obligated to settle the loan's outstanding balance. If they do not wish or can’t afford to keep the home, they can sell it to pay off the reverse mortgage balance. If the balance due exceeds the home’s value, the FHA insurance will make up the difference.

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's possible 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 who is not on the loan has moved in 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.

Use 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. 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 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.

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 for reverse mortgage borrowers and family members who may be affected to 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.