How Do You Pay Back a Reverse Mortgage?
By: Courtney Jorstad
November 30, 2023 • 9 minute read
One of the most attractive features of a reverse mortgage is that you do not have to pay it back in the form of monthly payments. This is one of the ways that a reverse mortgage helps to free up some cash during retirement.
That being said, a reverse mortgage is a loan, and it will need to be paid back at some point. If you are looking into taking out a reverse mortgage loan on your property, this is an important factor to understand before moving forward.
This article is all about how you pay back a reverse mortgage.
How Does a Reverse Mortgage Work?
A reverse mortgage is a unique financial product exclusively available to homeowners aged 62 and above. It is a loan where the borrowed amount is secured against the home’s equity.
The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM). HECM reverse mortgages are regulated and backed by the federal government. They are regulated by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
Other types of reverse mortgages include single-purpose reverse mortgages and proprietary reverse mortgages, which are jumbo loans that a reverse mortgage lender offers that allows homeowners to borrow more than the FHA lending limit for HECM loans. The current FHA lending limit for 2024 is $1,149,825.
With a HECM reverse mortgage loan, monthly mortgage payments are eliminated because the reverse mortgage pays off the existing mortgage at the time that the HECM loan is obtained, if the homeowners still have one.
For any remaining funds, lenders offer various options to receive funds: a lump sum, monthly payments, a line of credit, or a combination of these choices.
Common Reasons for Reverse Mortgage Repayment
Homeowners do not have to pay back the reverse mortgage loan as long as meet the requirements for having the loan: they live in the home the majority of the year, they continue to pay the property taxes, they continue to pay the homeowners insurance, and they maintain the home.
While there are a variety of reasons reverse mortgage borrowers may decide to pay back a reverse mortgage. Here are some possible events that may trigger paying back the loan:
- Homeowner moves. If a homeowner decides to move, the sale from the home will pay back the loan.
- Homeowner passes away. If the last surviving borrower or eligible non-borrowing spouse passes away, the loan will need to be paid back.
- The home is no longer the primary residence. If the homeowners spend more time at a secondary residence than they do at their principal residence, this will trigger the need to sell the home. This may also happen if the homeowner moves into a long-term assisted living facility or decides to move in with a family member.
- The home is not maintained. If the homeowner fails to keep up with the maintenance of the home as required by the terms of loan, they may be required to pay back the loan.
- The homeowner fails to pay property taxes or homeowners’ insurance. If the HECM borrowers fail to pay the required property taxes or homeowners’ insurance, they may also be asked to pay back the loan.
- Personal reasons. The homeowners may also have personal reasons for wanting to pay back the loan. This may happen if they find they no longer need the reverse mortgage proceeds.
Typically, if there are home repairs that need to be done or you fall behind on property taxes, the lender will give you a time frame to resolve the issue before you have to sell. You will need to talk to your lender for more specific details about how these issues are handled.
How Do You Pay Back a Reverse Mortgage?
If you decide you want to pay back the reverse mortgage, these are the options that you have available to you.
Sell the Home
One way to pay back a reverse mortgage loan is to sell the home. Once you sell the home, you can use the proceeds to pay off the loan balance.
If the value of the home has gone up since the reverse mortgage was originated, the homeowners can keep any remaining funds after the total loan amount is paid off.
If the value of your home has dropped and you’re concerned that the sale amount may not be enough to pay back the loan, the FHA created a rule that homeowners who have a reverse mortgage will never owe more than 95 percent of the appraised value of the home.
Refinance the Mortgage
If you want to keep the home, one way of paying back the reverse mortgage is to refinance the mortgage and then take out a regular mortgage.
Alternatively, homeowners may also decide to refinance into another reverse mortgage if interest rates are significantly lower than what they were when you originally took out the loan.
Use Personal Funds
Homeowners may also use personal funds to pay back a reverse mortgage.
Some homeowners use a reverse mortgage to supplement their retirement income while they wait for their other investments to reach full maturity. Or if they retire when the market is in a downturn, they may decide to hold off on using their retirement investments until the market turns around.
When they decide to access their retirement funds, a reverse mortgage borrower may decide to pay back the reverse mortgage at that time.
Give the Lender the Deed in lieu of foreclosure
If the homeowners decide they want to walk away from the home, they also have the option to hand over the deed to the lender to avoid foreclosure. This is typically a last resort option.
How is the Reverse Mortgage Paid Off After the Last Borrower Passes Away?
If a homeowner is still living in a home with a reverse mortgage when he or she passes away, the heirs will have the option to decide what they want to do with the home.
They will need to pay off the reverse mortgage loan if they want to do any of the following:
- Keep the home. If they want to keep the home, they can pay off the reverse mortgage by taking out a traditional mortgage to pay off the loan or paying cash for the home.
- Sell the home. The heirs can also pay off the reverse mortgage by selling the home.
The heirs are not legally obligated to pay off a reverse mortgage loan. If they don’t want to keep or sell the home, they also have the option to do nothing and turn the home over to the lender to handle the selling of the home.
Can Heirs Sell a Home with a Reverse Mortgage?
Yes, heirs have the option to sell a home with a reverse mortgage if they don’t want to keep it. When the borrower passes away, the reverse mortgage becomes due. Selling the home is a common solution, as it allows the heirs to pay off the reverse mortgage with the proceeds from the sale.
If the home sells for more than the full loan balance, the heirs will be able to keep the proceeds. The heirs will never owe more than 95% of the appraised value.
How Do Heirs Pay Back the Loan if They Want to Keep the Home?
When heirs wish to keep a home with a reverse mortgage, there are a few options available to pay back the loan. First, they can choose to repay the loan using personal funds or savings. Second, heirs may decide to refinance the reverse mortgage into a traditional mortgage. This option allows them to take out a new loan in their name and use the proceeds to repay the reverse mortgage.
How Long Do You Have to Pay Back a Reverse Mortgage?
Once a reverse mortgage becomes due, the heirs will typically have up to six months to settle the loan. However, the exact time you have may vary depending on the lender. Lenders may also allow for an extension if the home doesn’t sell within the allotted time period or if a sale is underway.
Can Homeowners Make Payments on a Reverse Mortgage if They Want to? Is There a Pre-Payment Penalty?
Yes, homeowners have the option to make payments on a reverse mortgage if they choose to do so. While a reverse mortgage is primarily designed to provide income to homeowners without requiring monthly mortgage payments, it does not prohibit borrowers from voluntarily making payments.
These payments can be made towards the loan balance, reducing the amount owed and potentially increasing the equity in the home. Making payments can be advantageous for homeowners who wish to minimize the interest accrued over time or retain more equity for their heirs.
For borrowers who opt to receive their money as a line of credit, unused money will grow, which is another reason why homeowners may want to replenish those funds.
Before doing so, consult with the loan servicer to ensure that the payments are properly allocated and credited towards the reverse mortgage loan.
It’s important to note that making payments on a reverse mortgage is not a requirement and is entirely optional based on the homeowner’s preferences and financial circumstances.
Is It Hard to Sell a House That Has a Reverse Mortgage?
It is not any harder to sell a house with a reverse mortgage than it is to sell a house with a traditional mortgage.
Before putting your house on the market, it is recommended that you contact your reverse mortgage lender and ask for the full payoff amount in writing, so that you can make sure the asking price will accommodate the loan.
How Long Can I Live in My House with a Reverse Mortgage?
With a reverse mortgage, homeowners can typically live in their house as long as it remains their primary residence. The duration of residency is not limited by a specific time frame as long as the property continues to meet the reverse mortgage requirements: the home remains the primary residence, the property is maintained, property taxes are up to date, and homeowners’ insurance is paid.
If the borrower has a spouse who is also named on the reverse mortgage, they can continue to reside in the home even after the borrower’s death.
Understanding how to pay back a reverse mortgage is essential for homeowners considering this financial product. While a reverse mortgage eliminates the need for monthly payments, repayment becomes due when the borrower permanently moves out, sells the property, or passes away.
Options for repayment include selling the home, refinancing the mortgage, using personal funds, or giving the lender the deed in lieu of foreclosure. Heirs also have choices if they want to keep the home, such as repaying the loan with personal funds or refinancing into a traditional mortgage.
It’s important to note that there is no prepayment penalty, and homeowners have the flexibility to make voluntary payments if they choose to do so. Selling a house with a reverse mortgage is not inherently more challenging than selling a house with a traditional mortgage. As long as the property meets the requirements, homeowners can live in their house with a reverse mortgage for as long as it remains their primary residence and they meet the other requirements.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.