How Do You Pay Back a Reverse Mortgage: Everything You Need to Know

You know about reverse mortgages, don’t you? They let you borrow money using your home as collateral. The money you borrow must eventually be repaid, of course. So, how do you pay back a reverse mortgage? Is there something specific you should know about it? There are actually several options. Let’s take a look.

What is a Reverse Mortgage?

We’ll start from the very beginning. What exactly is a reverse mortgage? It’s a type of loan that allows older homeowners to convert some of their home equity into cash payments. Most reverse mortgages are home equity conversion mortgages (HECMs). They’re backed by the U.S. Department of Housing and Urban Development (HUD).

When you take out a reverse mortgage, the lender first pays off the balance on your current home loan. Then, the lender sends you the rest of the proceeds in a lump sum, in a line of credit or through monthly payments.

Loan repayment doesn’t involve making monthly payments to the lender, as is the case with a traditional mortgage. Instead, the entire reverse mortgage balance is due under specific conditions.

Read more: What Are the 3 Types of Reverse Mortgages?

When Do You Have to Pay Back a Reverse Mortgage?

The entire balance on a reverse mortgage is due after a trigger event. Here are some of the situations worth mentioning:

• Borrower’s Death: The reverse mortgage is due when the last surviving borrower passes away. With an HECM, the heirs typically have 30 days to buy, sell, or turn the home over to the lender.
• Relocation: When the borrowers no longer use the home as their primary residence, they’ll need to repay the reverse mortgage. This may happen if the borrowers enter an assisted living facility, move in with family, or move to a new property.
• Home Sale: The last surviving borrower, eligible non-borrowing spouse or heir will need to repay the reverse mortgage if they decide to sell the home.
• Loan Obligations: The reverse mortgage may come due if the homeowner fails to meet their loan obligations, such as maintaining the home, paying property taxes and keeping up with homeowners’ insurance.

How Do You Pay Back a Reverse Mortgage

Now, it’s time to find out how do you pay back a reverse mortgage. Here are your primary options:

Sell the Home

You or your heirs can sell the home and use the funds to pay back the lender for the reverse mortgage. If the value of the home is greater than the loan balance, you can keep the difference after selling the property.

One key benefit of an HECM is that a borrower never has to pay back more than 95% of the appraised value of the home. So, if the value of the house is less than the amount you owe, you’ll use the sale proceeds to pay back part of the loan. Mortgage insurance will make up for the rest.

Refinance Into a Traditional Loan

If you or your heirs want to keep the home but don’t want to live in it, the reverse mortgage can be refinanced into a traditional mortgage loan. The new loan will pay off the reverse mortgage balance.

The borrower, which is you or your heirs, will need to go through the underwriting process. This involves meeting minimum credit score and debt-to-income ratio (DTI) requirements. The Reverse Mortgage Broker California will also check the amount of equity in the home.

Once you refinance, you’ll need to make regular payments on the new loan to retain the home.

Utilize the Right of Rescission

Most reverse mortgages can be canceled within three days of signing the closing documents. Within this period, you can cancel the transaction for any reason without being penalized. This is described as your right of rescission.

You have to notify your lender in writing if you want to cancel the mortgage. Just sign and submit a letter by certified mail, and ask for a return receipt.

The lender must return any money you’ve pain for processing the reverse mortgage within 20 days. If you received money in the transaction, you’ll need to return the funds to the lender.

Use a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an arrangement where a borrower hands over the deed to the lender along with the keys. In doing so, they effectively forfeit the home.

Borrowers may choose this option when they can’t keep up with the home maintenance, taxes and insurance payments, or they want to move out of the home but can’t sell it. With this strategy, both the borrower and lender can avoid a costly foreclosure process.

Consult a housing counselor or foreclosure attorney before moving ahead. If you choose this route, the deed in lieu of foreclosure will affect your credit. Thankfully, the effect is usually not as severe as foreclosure.

 Pay It Back with Your Own Funds

You may also pay off a reverse mortgage balance with your own funds. Your heirs have this option too. It’s a simple option you can look into if you have enough cash to spare.

In most cases, you can do this whenever you want without a prepayment penalty.

To pay off the reverse mortgage, contact the lender and ask about the process. You may be able to chip away at the balance through a series of payments or pay it off in one lump sum.

Should You Get Out of a Reverse Mortgage?

It isn’t always easy or smart to get out of a reverse mortgage. However, it may be wise to get out if one or more of the following situations arise:

• Your Financial Situation Has Improved: If you don’t the payments provided by the reverse mortgage, you might decide to get out of the loan.
• You’re Planning to Move Soon: You may also decide to pay off the reverse mortgage if you need or want to permanently move to another location.
• You Plan on Leaving the Home to Heirs: A home is a major asset that you might want to keep in the family after you pass away. In this case, it could make sense to exit the reverse mortgage.

The Takeaway

So, how do you pay back a reverse mortgage? You should already know the answer if you were with us since the beginning. In any case, with a reverse mortgage, you can utilize the equity in your home to free up cash for expenses. If you’re hesitant about getting a reverse mortgage or don’t qualify for one, you may want to consider a cash-out refinance, home equity loan, or home equity line of credit from a Reverse Mortgage Broker California. However, if you do get a reverse mortgage, you’ll want to know how do you pay back a reverse mortgage.

FAQs

1. Do heirs have a deadline to repay a reverse mortgage after the borrower dies?

Yes. Heirs typically have a limited timeframe to repay the reverse mortgage, usually starting with an initial notice period, during which they must decide whether to sell, refinance, or surrender the home.

2. Can you pay back a reverse mortgage before a trigger event occurs?

Yes. Borrowers can repay a reverse mortgage early at any time without a prepayment penalty, either partially or in full, by using personal funds or proceeds from refinancing.

3. What happens if the home value is lower than the reverse mortgage balance?

With most HECM loans, borrowers or heirs are not responsible for the full balance if the home value is lower. Mortgage insurance covers the remaining amount owed.

4. Does paying back a reverse mortgage affect Social Security or Medicare benefits?

No. Repaying a reverse mortgage does not impact Social Security or Medicare benefits because the loan repayment involves home equity, not income or government benefit eligibility.

5. Is counseling required before paying off or exiting a reverse mortgage?

Counseling is not always required, but speaking with a HUD-approved housing counselor or financial professional is strongly recommended before repaying, refinancing, or surrendering a reverse mortgage.