Reverse mortgages are specifically for homeowners 62 and older, allowing them to access home equity without increasing their monthly debt burden. Like any loan, a reverse mortgage has to be paid off eventually.
As long as the borrower lives in the home 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 will explain your options when a reverse mortgage becomes due. We will also discuss common ways to pay off a reverse mortgage quickly. Read on to find out what you need to know about paying off a reverse mortgage and whether a Reverse mortgages are a good idea for you.
How does a reverse mortgage work?
Reverse mortgage Insurance is administered by the Federal Housing Administration (FHA) under the auspices of the US Department of Housing and Urban Development (HUD). They are specifically designed to allow older homeowners to borrow money while not adding to 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 home equity reverse mortgages or jumbo loans. Depending on the type of loan, the interest rate charged may be fixed or adjustable.
Like a traditional home equity loan, homeowners convert home equity into cash. Unlike a home equity loan, there are no monthly payments to be made. Therefore, a reverse mortgage is a mortgage that pays you instead of the other way around.
Reverse mortgage lenders May 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 disbursed as a lump sum, installment payments, a line of credit similar to a home equity line of credit (HELOC), or a combination of these. To qualify for a reverse mortgage, you must first build significant equity in your home or own it outright. If you are carrying a mortgage balance, you will need to pay it off with a reverse mortgage before you can receive the remaining funds.
Other eligibility criteria include:
- You must continue to live in the home as your primary residence and maintain the property
- You must continue to pay home owners 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 anything you want, including home renovations. Under the installment loan option, you can continue to receive payments as long as the reverse mortgage requirements are met. This can lead to a situation where the outstanding loan is more than the value of the home.
However, because of FHA insurance, borrowers or their heirs will never owe more than 95% of the appraised value of the home because FHA will pay any excess balance to the bank.
How do you pay off a reverse mortgage?
If you or your heirs want to retain the home, there are two options. Either repay 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 any case, if the reverse mortgage balance is more than the appraised value of the home, your heirs will not have to pay more than 95% of the appraised value.
If you or your heirs don’t want to keep the home, it can be sold, and the reverse mortgage can be repaid from the sale proceeds. Any remaining funds go to you or your estate. As a last resort, the home deed can be signed over to the lender, at which point the loan is considered paid off.
When is a reverse mortgage due?
Reverse mortgage repayments begin when you, your surviving co-borrower or your eligible non-borrower spouse dies, sells the home or moves permanently into a nursing home or assisted living facility. Convenience changes, for example. Additionally, a reverse mortgage can also be created if you still live in the home but fail to meet the requirements for a reverse mortgage.
If you or your heirs want to retain the house, the outstanding loan amount must be paid. It is important to note here that your heirs are not responsible for settling the outstanding loan amount. If they don’t want to or can’t afford to keep the home, they can sell it to pay off the reverse mortgage balance. If the balance exceeds the home’s value, FHA insurance will cover the difference.
How to get out of a reverse mortgage quickly
There are several reasons why you might 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 home to your heirs without the financial burden of paying off the loan. It is also possible that someone who is not on the loan has moved in and you do not want them to be evicted if you leave the property or die.
Regardless of intent, there are a few ways to get out of a reverse mortgage while you’re still in the home.
Exercise the right of return
This option is only suitable for a short period of time. After closing a reverse mortgage you have three days to cancel the entire thing without incurring fees or penalties. Then, the lender will have 20 days to refund the servicing fee and closing costs already charged. If you get buyer’s remorse and decide to go this route, you’ll need to notify the lender in writing.
Pay off the debt
It may seem like a no-brainer, but you can always pay off your reverse mortgage balance if you qualify. You will have to repay the entire loan amount along with the current interest charges. To do this, you can opt for a lump sum or pay back in installments. But once paid off, no more reverse mortgages.
Refinance into a conventional mortgage
You can always refinance a reverse mortgage into a conventional mortgage. This means you’ll be back to making monthly mortgage payments like you used to. However, if you want to leave the home to your heirs, you are reducing or eliminating the amount they will owe to keep it. Traditional origination fees and closing costs associated with conventional mortgage refinancing will apply and need to be paid upfront, so be sure to check with your lender about what these will be.
Money Summary How do you repay a reverse mortgage?
A reverse mortgage can be a great way for Americans 62 and older to access supplemental retirement income to make things easier in their fall years. However, it is important for reverse mortgage borrowers and family members who may be affected to know all the facts and information before proceeding.
If you want to keep the home, a reverse mortgage must always be paid off by the original borrower or their heirs. If you don’t want to keep the home, you can sell it and use the proceeds to pay off the reverse mortgage balance.
