How do you pay back a reverse mortgage?

Many homeowners over 62 may take advantage of a reverse mortgage to supplement their retirement income. With a reverse mortgage, the homeowner can borrow against their home equity. While the loan does not require monthly repayments, it must be repaid upon the owner’s moving or death.

Here’s what you need to know about paying back your reverse mortgage.

Key Insights:

• A reverse mortgage doesn’t need to be repaid until the borrower moves out of the home or dies.
• Heirs have 30 days after receiving the payable notice from the lender to repay the loan or sell the home.

How to get out of a reverse mortgage

You might find that you no longer want your reverse mortgage and can choose to pay off your reverse mortgage at any time.

These are the most common ways homeowners may get out of a reverse mortgage:

1. Sell your home

The most common way to repay a reverse mortgage is to sell the home and use the proceeds to pay back the loan. You are fully responsible for completing the transactions, and you only receive the leftover equity after settling your reverse mortgage in full. After the borrower’s death, their spouse or heirs will be responsible for selling the property.

If the reverse mortgage amount is higher than the home's selling price, you don’t need to worry. Reverse mortgages are usually nonrecourse debts, and you will never owe more than the value of your home.

2. Pay with savings

While most reverse mortgage borrowers won’t have enough in savings to pay off their loan, you can always opt to start saving now to make a lump-sum payment later. Consider making monthly “payments” to a savings account that you can use when your loan comes due.

Paying with savings might also be a viable option for heirs who are willing to pool their money or those who receive a significant cash inheritance or life insurance payout. Heirs of home equity conversion mortgage (HECM) borrowers can even choose to pay 95% of the home’s appraised value if that’s less than the remaining balance on the reverse mortgage.

3. Refinance

Refinancing your reverse mortgage into a forward mortgage is another way to pay without selling the house in question. This involves getting another loan from a different lender to pay off your reverse mortgage in full.

In case of your death, refinancing can also be a solid option for your heirs if they want to keep the home. In this case, they would need to get a traditional forward mortgage to convert the loan.

When do I have to pay back a reverse mortgage?

There are three major events that require a reverse mortgage to go into repayment: selling, moving or death. However, this payback clause can come into effect for other reasons:

Make sure you know your contract’s rules for loan repayment before taking out a reverse mortgage.

• It is no longer your primary residence: If you spend more time in a vacation home or move to an assisted living facility or nursing home for more than 12 consecutive months, your reverse mortgage must be repaid.
• Transferring the title of the home into someone else's name: If you want your spouse or heir to be listed as a co-borrower, they must be over 62 years of age and meet loan requirements. You will need to refinance the reverse mortgage to put their name on the loan.
• Defaulting on any of the terms or conditions of your reverse mortgage: Lenders require homeowners to keep their homes in good condition and stay current on taxes, homeowners insurance and any homeowners association (HOA) fees.

However, if you pass away and your spouse is not a co-borrower of the loan, they may be able to continue living at the property if they meet the U.S Department of Housing and Urban Development’s requirements for a “nonborrowing” spouse without having to repay the loan until it reaches maturity. They will not receive any more payments from the loan, though.

When does my heir have to pay back a reverse mortgage loan?

An heir has 30 days from receiving the payable notice to repay the loan, sell the home or turn the home over to the lender. Your heir will never have to repay more than the full loan balance or 95% of the home’s appraised value — whichever is less.

Tips for selling a home with a reverse mortgage

You may decide that you no longer want to live in your home and you’d prefer to sell it.

Fortunately, even if you have a reverse mortgage, you can still sell your home. It’s similar to the process of selling a home without a reverse mortgage, but there are some differences.

• You should contact your reverse mortgage lender first. Your lender can detail the exact amount you owe on the loan and how to satisfy your obligation to repay.
• Contact a real estate attorney. A real estate attorney can help clarify the technicalities of repaying your reverse mortgage.
• Pay immediately. After you have sold the home with a reverse mortgage, ensure that that lender receives the payment and closes your account as soon as possible. Remember that you are entitled to any remaining equity.

Make sure you have somewhere else to live if you plan on selling, and make sure that your new home is affordable. You’ll also want to check the equity you have left after taking out the reverse mortgage if you plan to use some of it to purchase or pay rent on your new home.

Bottom line

A reverse mortgage is a way to take cash out of your home equity, stay in your home and not have to repay the lender with monthly payments. Fortunately, once you take out a reverse mortgage, you are not permanently stuck with that choice. You can pay back your reverse mortgage at any time. Additionally, you can choose to refinance your reverse mortgage back to a conventional loan.