You generally pay back a reverse mortgage through your home’s sale proceeds. But you can also choose other methods of repayment.
Reverse mortgages typically become due at loan maturity, which happens when you sell your home, move into long-term care, or permanently leave your home. But you can also choose to pay off your loan early.
Sell Your Home
A reverse mortgage typically allows borrowers to pay back the loan with proceeds from their home sale. Generally, the lender will accept 95% of the home’s appraised value or the total loan balance, whichever is less.
Heirs generally have 30 days to decide what to do with the home and loan once they receive notice that it is a “loan maturity event.” This could occur if a borrower sells the property, permanently leaves it, or passes away.
Heirs must repay the balance of the reverse mortgage when it becomes due, whether they use home sale proceeds or take out a traditional mortgage. If they don’t, the lender may take other actions, such as launching foreclosure proceedings.
It’s important that heirs keep in touch with the lender to ensure they are actively trying to sell their home and ask for extensions if necessary. This makes it easier to avoid the costly consequences of foreclosure. It also helps them make sure they don’t end up walking away with more debt than they started with.
Refinance
Reverse mortgages are complicated loans and require a lot of upfront costs. Whether you’re the borrower or an heir seeking to resolve a reverse mortgage, take your time to consider all options carefully before making any decisions.
Ordinarily, a reverse mortgage enters repayment in one of two ways: when the property is sold or when the borrower passes away. However, you can refinance your current reverse mortgage into a new loan with better terms, such as lower interest rates or access to more equity.
Refinancing typically only makes sense if the new terms are significantly better than those of the original loan. Refinancing could help you save on upfront costs, change an adjustable rate to a fixed rate, pay off your loan faster or even help you qualify for a higher mortgage value.
This is only possible when you meet specific eligibility criteria. You may also be required to provide additional financial information and documentation.
Sell on Your Own
If you no longer need a reverse mortgage or the loan is in jeopardy of triggering a maturity event, it may be possible to sell your home and use the proceeds to pay off what you owe. Ask your lender for a payoff quote that includes the outstanding balance, interest, mortgage insurance premiums, and fees.
You or your heirs will still have to pay property taxes and homeowners insurance on the house, keep up with homeowner association dues, and maintain the home as needed. If you become delinquent on any of these obligations, the lender may call your mortgage due and foreclose on the home.
The process becomes more complicated if your home value has decreased since you took out the loan. In this case, the sale proceeds will have to cover what you owe your lender, leaving less profit for yourself or your heirs. If this is the case, you might be better off waiting until market value trends are more favorable.
Repay the Lender
Reverse mortgages are complicated financial tools that provide a lifeline for many senior homeowners. But they’re not without their risks. And sometimes circumstances change, and the borrowers regret their decision to take out this type of loan.
Reversal of the loan usually occurs when the property is sold or the borrower dies. In either case, the lender is repaid from the proceeds of the sale or estate. The amount owed is the sum of all advance payments, accumulated interest and costs.
In some cases, a borrower can get out of a reverse mortgage by practicing their right of rescission, a 3-day window after closing in which they can cancel the transaction. However, this typically results in a loss of fees and closing costs that the borrower paid.
Ultimately, it’s often best to work with an experienced reverse mortgage specialist. This helps to ensure that the process is as easy and hassle-free as possible. Moreover, it’s the best way to avoid any potential issues down the road.
