How to pay back a reverse mortgage

Retirement is a significant milestone representing a well-deserved period of rest after years of hard work. However, it's important to acknowledge that this phase in your life can come with financial constraints. To maintain a comfortable lifestyle during retirement, it's recommended retirees aim for approximately 70% to 90% of their pre-retirement income. Nevertheless, this target income isn't always attainable.‍

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If you find yourself struggling to keep up with monthly mortgage payments after retirement, a reverse mortgage may be worth exploring. Reverse mortgages allow you to supplement your retirement income while being able to stay in your home. Designed specifically for the needs of seniors, reverse mortgage loans can provide a much-needed financial cushion throughout retirement.

How does a reverse mortgage work?

In a traditional mortgage, you borrow money from a lender to purchase a home and repay the loan through monthly payments. In a reverse mortgage, it's just the opposite.

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The reverse mortgage lender pays the borrower monthly payments, a lump sum amount, or via a line of credit secured through their home's equity. 

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There are various types of reverse mortgages, each with distinctive characters. However, the most common type of reverse mortgage is the home equity conversion mortgage (HECM). These loans are insured by the Federal Housing Administration (FHA) and offer the most consumer protection. 

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Other types include proprietary reverse mortgages, popular among homeowners with high property values, and single-purpose reverse mortgages, which can only be used for specific purposes, such as home repairs or property taxes. 

When do you pay back a reverse mortgage?

Reverse mortgages have no monthly payments but are repaid via a single lump sum balloon payment.

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Loan repayment on a reverse mortgage is usually triggered—and due in full—when the last surviving borrower or eligible non-borrowing spouse:

• Passes away
• Sells the home
• Is no longer living in the home as their primary residence

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An eligible non-borrowing spouse is a spouse who is not a co-borrower but is allowed to stay in the home after the borrower’s passing under the guidelines set by the U.S. Department of Housing and Urban Development (HUD).

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Various situations may require borrowers to pay back reverse mortgages sooner than planned. This could happen if the owner fails to keep up with property taxes, homeowners insurance, or property maintenance.

How do you pay back a reverse mortgage?

Whether you’re looking to get out of a reverse mortgage early or want to be prepared for the future—here’s how to repay a reverse mortgage:

Sell the home

One of the most common ways to settle a reverse mortgage is with proceeds from the sale of the property. 

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If the home's value exceeds the loan balance, you or your heirs retain the surplus.

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If the home's value is lower than the loan balance, you may still be covered. HECMs are non-recourse loans, meaning you'll never owe more than the property is worth. The FHA insurance will cover the difference if your property sells for less. 

Refinance the reverse mortgage

Refinancing allows you to replace your current reverse mortgage with a new one better suited to your needs. This could help you obtain a new loan with a lower interest rate, switch from an adjustable rate to a fixed rate, accelerate loan repayment, or gain access to more equity.

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Applying will be similar to taking out your first reverse mortgage loan. Approval will depend on your age, home value at the time, interest rates, and the percentage of equity you own. 

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It's important to note that refinancing comes with closing costs. To ensure the refinance is worthwhile, the benefits gained from the new terms should outweigh the fees. 

Take out a new loan

If you or your heirs would like to keep the home, it's possible to buy out a reverse mortgage by simply taking out a new mortgage on the property. When switching to a conventional loan, the borrower goes back to making monthly mortgage payments. It's similar to refinancing the loan, where you'll need enough to cover the debt balance. 

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However, unlike refinancing into another reverse mortgage, qualifying will depend on meeting specific credit score, income, and debt-to-income (DTI) ratio requirements.

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Again, associated closing costs and fees are worth consideration before taking out a new loan. 

Leverage a home equity investment

A home equity investment (HEI) allows homeowners to tap into their equity for a lump sum payout in exchange for a share of the property's future appreciation. Like a reverse mortgage, there are no monthly payments. Instead, an HEI is repaid anytime during a flexible 30-year term when the homeowner decides to sell the home, refinance, or use another source of funds. 

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Since there's no restriction on how you can use an HEI, the funds can be used to pay off a reverse mortgage and regain ownership of your property.

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Unlike home equity loans or HELOCs, HEIs have less stringent requirements. There are no income or debt-to-income requirements. You just need a credit score above 500 and sufficient equity to qualify. 

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An HEI can also be a great alternative if you haven't yet committed to a reverse mortgage. 

Use cash or other assets

You can also choose to repay your reverse mortgage with cash or a valuable asset. Borrowers or their heirs could also sell a vehicle, personal possessions, or other property to pay back a reverse mortgage loan.

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Individuals can also consider liquidating investments such as stocks, bonds, or mutual funds to repay the loan. Inheritance funds, whether received or anticipated, can also be utilized. Cash or other assets may be a good option if the money is readily available or you’re unwilling to let go of the home.

Opt for a deed in lieu of foreclosure

If repaying the reverse mortgage becomes unmanageable, you (or your heirs) can opt to transfer ownership of the home to the lender. This process called a "deed in lieu of foreclosure," allows the borrower to surrender the deed voluntarily, bypassing the formal foreclosure process. 

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While it's typically considered a last resort, it can help individuals or families avoid the financial and emotional toll of foreclosure proceedings. 

Frequently asked questions

Can you get out of a reverse mortgage?

Yes, you can get out of a reverse mortgage using your right of rescission. This is a 3-day grace period after your loan closes, during which you can cancel the transaction penalty-free. If the grace period has passed, you'll have to repay the loan fully to settle it. 

How many years do you have to pay back a reverse mortgage?

There's no set time frame to pay back a reverse mortgage. Repayment is usually required when the borrower sells the home, moves out permanently, or passes away. However, early loan repayment may be triggered if the borrower fails to keep up with property taxes, home maintenance, or homeowners insurance. 

Who is responsible for paying back a reverse mortgage?

The borrower or their heirs are responsible for repaying the reverse mortgage. However, anyone can pay off the balance, including the borrower, their spouse, heirs, or other family members. This often occurs when the last surviving borrower or an eligible non-borrowing spouse passes away, and the heirs decide to settle the reverse mortgage balance.

When does a reverse mortgage make sense?

A reverse mortgage can be a valuable tool if you're looking to boost your income or improve your lifestyle during retirement. Alternatively, if passing on the responsibility of repayment to your heirs or saying goodbye to your family home is not ideal, it may be worth exploring other options. Be sure to weigh the pros and cons of reverse mortgages before applying. 

Final thoughts

Paying back a reverse mortgage can seem daunting, but understanding your options makes the process more manageable. Whether you plan to sell the home, refinance, or allow heirs to handle repayment, knowing the steps involved can help you make informed decisions. It's important to review the terms of your reverse mortgage and communicate with your lender to avoid complications down the line. 

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Accepting that the home you worked so hard to own may no longer be in the family after you’re gone can be difficult. Don’t let go of your property before it’s time. Consider Point’s Home Equity Investment to supplement your income. Visit Point to find out if you qualify to fund your financial goals without new monthly payments.

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