When and How Do You Pay Back a Reverse Mortgage?

Having an exit strategy in place is essential if you've got a reverse mortgage. A reverse mortgage is a type of loan usually marketed to older homeowners. With a reverse mortgage, you're accessing the unencumbered value of the property. The property secures reverse mortgages and doesn't typically require monthly mortgage payments. They can seem like a dream for seniors who need to make ends meet. But should you use them? Read on to understand how you pay back a reverse mortgage and what you need to know about taking out the equity on your home loan. 

How Do Reverse Mortgages Work?

As the name implies, a reverse mortgage lets you "reverse" the mortgage and dip into the equity you've built up in a home. These loans are typically only available to homeowners age 62 and older who want to borrow from their home equity without making monthly payments. Seniors most commonly use reverse mortgages as a type of retirement security to make ends meet. 

A reverse mortgage must be paid back either when you sell the home or after you die. While it's relatively common for older homeowners to supplement their retirement accounts, reverse mortgages can drain your asset value, so a clear plan to repay one is essential. It can also help to speak with a financial advisor to create a retirement income plan that doesn't depend on a reverse mortgage.  

To qualify for a reverse mortgage, you:

• Must be at least 62 years old 
• Have enough equity in the home
• It must be your primary residence

When Do You Need to Pay Back a Reverse Mortgage? 

The most common reasons for repaying a reverse mortgage are a property sale or the property owner's death. Also called a home equity conversion mortgage (HECM), a reverse mortgage must be repaid in full when you die or sell the home. The lender recovers the money advanced to you, plus interest, when the home is sold.

You must pay back a reverse mortgage when:

• You sell the home
• You die
• You transfer ownership of the home (transfers the house title), which most lenders will consider "sold"
• When the mortgage borrower no longer resides in the home
• When the home is no longer your primary residence
• If you don’t uphold the original loan obligations, such as paying property taxes and homeowners insurance

How Do You Pay Back a Reverse Mortgage?

You pay back a reverse mortgage using the proceeds of the home's sale. If the loan comes due because the owner died, the heirs must repay the reverse mortgage from the inheritance or sale of the property. They also have the option to refinance the property with a traditional mortgage or purchase the home from their own funds. 

In case of the option to purchase the home, the heirs may buy it for 95% of the appraised value or the amount due on the loan, whichever is less. Finally, the heirs have the option to sign the title over to the lender and walk away from the loan.

Use Your Right of Rescission

Reverse mortgages have a three-day cancellation option called the right of rescission. With most reverse mortgages, you have a three-day right to cancel the reverse mortgage. With this, you can cancel the deal for any reason, penalty-free, within three business days after closing the loan. 

Repay the Loan

The most obvious way to repay a reverse mortgage is to repay the loan. You will need to pay the full loan amount plus interest. Speak to the lender to organize repayment in full. 

Refinance Into a Conventional Mortgage 

You also have the option to refinance the property into a traditional mortgage. If you cannot repay a reverse mortgage and want to leave your heirs with greater asset value, consider refinancing. In that case, you should carefully compare lenders' best offers to move ahead with securing the new mortgage. Find some of the best mortgage refinancing options here.

Take Out a New Mortgage 

You could take out a second mortgage to pay back your reverse mortgage. The loan will pay off your reverse mortgage and you can start making monthly mortgage payments again. Keep in mind taking out a new mortgage comes with closing costs, and you’ll need to make monthly loan payments. 

Provide a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an option to convey all interest in a property to the lender to satisfy a loan in default. This option avoids foreclosure proceedings, but it should be a last resort.  

Sell the Home 

If you sell the home, the revenue from the sale will be used to repay the loan, while any remaining will be yours. Depending on what you owe, you’ll keep any of the remaining sale proceeds after you pay off the loan. For example, if you owe $150,000 on the loan and sell the home for $400,000, you’ll pay off the loan first, then keep the remaining $250,000.

If you owe more than your home is worth, consider HECMs offered through the FHA. With these nonrecourse loans, you will never owe more than your home is worth. If you sell your home for less than what’s owed on the loan, FHA insurance can pay the difference. 

Reasons to Get Out of a Reverse Mortgage

There are many personal or financial reasons to exit a reverse mortgage. The most common are:

• You need to move into a nursing home or assisted living.
• You realize your reverse mortgage proceeds aren’t enough to stay current with your homeowner's insurance, property taxes and home maintenance costs.
• You want to leave the home to your heirs and don’t want them to have to purchase it.
• You no longer need the financial assistance of a reverse mortgage.
• You live with someone not on the loan, and they could be kicked out of the home if you pass away.

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Should You Pay Back a Reverse Mortgage?

Paying back a reverse mortgage can ensure that your heirs don't need to buy the property or repay the loan and that you regain lost home equity. There are various options to pay back a reverse mortgage, from mortgage refinancing to a lump-sum payment. If you plan to sell and move to a different property, the property appreciation could be enough to cover the debt and leave you with a significant lump sum. Consider ideas to plan for retirement or get ideas to make money right now. 

Frequently Asked Questions