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A reverse mortgage is a type of home loan for older homeowners who have significant equity in their property. Rather than making monthly mortgage payments to a lender every month to pay down your balance, the reverse mortgage lender sends you payments as you tap your home’s equity. It can be a good source of income during retirement years.
However, like any loan, this unique type of mortgage must be repaid eventually. So, how do you pay back a reverse mortgage?
In this article:
How reverse mortgages work
A reverse mortgage allows homeowners to use their home equity for income while remaining in their houses. Rather than homeowners making payments toward the mortgage principal and interest to a lender, a reverse mortgage lender provides the borrowers with a lump sum, regular monthly payments, or a combination.
The income accrues interest that must be repaid under several circumstances — most commonly when the homeowners sell their house or pass away. The principal, interest, and fees accumulate monthly, meaning the total balance owed increases, and the home's equity is reduced over the loan term. This is the opposite of traditional mortgages: you gain home equity as the balance gradually decreases.
Reverse mortgages, most of which are Home Equity Conversion Mortgages (HECMs) through the Federal Housing Administration, are available to homeowners aged 62 and older for their primary residence, depending on how much equity they have in the home. The homeowners must keep paying their property taxes and homeowners insurance and keep the house in good condition when they have a reverse mortgage.
When do you need to repay a reverse mortgage?
Your lender may require you to pay back your reverse mortgage when one of several scenarios occur, including the following:
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You move, and the home is no longer your primary residence.
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You don’t pay your homeowners insurance or property taxes.
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You don’t keep the property in good condition.
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You sell the property.
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You are away for more than 12 months in a healthcare facility such as assisted living or a nursing home.
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You and any co-borrowers pass away.
Co-borrower vs. eligible non-borrowing spouse
As with a traditional mortgage, you may have one or more co-borrowers on your reverse mortgage loan. In that case, the reverse mortgage does not have to be repaid until all the co-borrowers move out of the house or die.
In addition, rules by the Department of Housing and Urban Development (HUD) allow an eligible non-borrowing spouse to remain in a house without repaying the HECM if they meet certain requirements, including:
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The borrower and non-borrowing spouse must be legally married and stay married until the borrowing spouse dies. (They must have been married when closing on the HECM — unless they were engaged but unable to get married due to their sexes before closing, as long as they got married later.)
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The non-borrowing spouse must be named a non-borrowing spouse in the reverse loan documents.
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The reverse mortgage cannot be in default unless it is related to the last borrower’s death.
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The non-borrowing spouse lived in the property when the reverse mortgage loan was closed and continues to live in it as their primary residence.
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The non-borrowing spouse must obtain title to the property or a legal right to remain in the property, such as a court order, for the rest of their life within 90 days after the death of the last surviving borrower.
A reverse mortgage must be paid off when the last surviving borrower or eligible non-borrowing spouse moves out of the residence or dies.
Why you may want to pay off a reverse mortgage early
While the above scenarios refer to times when a reverse mortgage must be repaid, you might also want to know how to pay off a reverse mortgage early.
If you apply for a reverse mortgage and change your mind, you have the right of rescission. This means you can notify the lender in writing within three business days to cancel the reverse mortgage and have any fees you paid returned.
In the longer term, there are several reasons you may want to pay off your reverse mortgage early, such as:
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You don’t need the money anymore.
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You want to move but keep your house as an investment or a second home.
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You want to leave your house to your heirs without a mortgage to be repaid.
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The reverse mortgage funds are not enough to keep up with your property taxes and homeowners insurance, so you want to sell and move.
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You find the accumulating debt of the reverse mortgage stressful.
How do you repay a reverse mortgage early?
There are multiple ways to repay a reverse mortgage early, depending on whether you want to keep your home or move.
If you want to keep your home, your options may include:
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Making incremental payments to lower your balance
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Paying back the loan balance in a lump sum with cash from savings or investments
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Refinancing the reverse mortgage into a traditional mortgage if you qualify
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Borrowing funds with a home equity loan or home equity line of credit (HELOC) to pay off the reverse mortgage balance
If you prefer to move, your options may include:
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Selling the house and using the proceeds to repay the reverse mortgage; if there are additional proceeds from the sale, you keep those funds.
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If you are struggling financially and unable to keep up with your property taxes and insurance, you may be in danger of losing your home to foreclosure — to avoid that process, ask your lender about a deed in lieu of foreclosure, which is faster and less costly than a foreclosure but still typically means you have to move.
Reverse mortgage payoff FAQs
If you inherit a house, how do you repay a reverse mortgage?
When you inherit a house with a HECM reverse mortgage, you have a few options for repaying the loan. If you want to keep the home, you can pay off the reverse mortgage with cash or take out a traditional loan to repay the reverse mortgage if you qualify. If you don’t want to keep the house, you can sell it, repay the loan, and retain any remaining proceeds. If the property sells for less than the loan balance, you can still repay as little as 95% of its appraised value. Typically, you have 30 days to buy, sell, or turn the house over to the lender after you receive a due and payable notice from the reverse mortgage lender. However, you may be able to extend that to six months, depending on the company.
Can you pay off a reverse mortgage early?
Yes, there is no prepayment penalty for paying back a reverse mortgage early.
What happens if I can’t pay off my reverse mortgage?
If you receive a notice that you are in default on your reverse mortgage because you did not pay your property taxes or homeowners insurance, keep your home in good condition, or certify that you are living in the house as your permanent residence, you may be able to rectify the situation and keep your home. For example, you can submit your missed payments as a lump sum or contact the lender about required repairs. If you can’t pay your taxes or insurance or repair your home, you are in danger of losing your house in foreclosure. If you no longer live in the house, you can sell it to pay off your reverse mortgage.
What happens if my reverse mortgage loan balance is more than the value of my home?
When you or your heirs repay your reverse mortgage, you may not have to pay the difference between your home's appraised value and the mortgage balance. A HECM reverse mortgage includes insurance that covers the difference as long as you or your loved ones pay back at least 95% of the house’s appraised value. Most reverse mortgages have a “non-recourse” clause, which means that you or your heirs can't owe more than the value of your home.
This article was edited by Laura Grace Tarpley.
