Paying Off a Reverse Mortgage: A Step-by-Step Guide

Paying off a reverse mortgage can be a complex process, but understanding the steps involved can make it more manageable. The borrower is typically responsible for paying back the loan, which can be done by selling the home, using other assets to pay off the balance, or paying cash.

To begin, the borrower must determine the outstanding balance of the reverse mortgage, which is typically more than the home's current value. This can be a challenge, especially if the borrower is struggling financially.

A reverse mortgage is a non-recourse loan, meaning the borrower or their heirs will not owe more than the home's value. This protection can provide peace of mind for borrowers.

The borrower can sell the home to pay off the reverse mortgage, but this may not be the best option if they're not ready to move.

To qualify for a reverse mortgage, you must be at least 62 years old and occupy the home as your primary residence. You can't just use it as a vacation home or rental property.

There are three main types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages. HECMs are the most common and are insured by the Federal Housing Administration (FHA).

To understand which type of reverse mortgage is right for you, consider the following factors: your age, the value of your home, and current interest rates. The older you are and the more valuable your home is, the more money you can borrow.

To be eligible for the program, you must be a US citizen or a permanent resident, and be at least 18 years old.

The program is open to individuals with a household income at or below 200% of the federal poverty level.

You can apply for the program if you have a disability or are a low-income individual.

The program is also available to individuals who are currently receiving government assistance, such as Medicaid or food stamps.

You must have a valid Social Security number to apply for the program.

The program is not limited to a specific age group, but you must be able to provide proof of income and residency to qualify.

To qualify for a reverse mortgage, you must be at least 62 years old and occupy the home as your primary residence.

There are three types of reverse mortgages available, each with its own set of benefits and requirements.

Home Equity Conversion Mortgages (HECMs) are the most common type of reverse mortgage, insured by the Federal Housing Administration (FHA), and can be used for any purpose.

A HECM loan is repaid when the homeowner moves out of the home, sells the home, or passes away, at which point the loan balance, including accrued interest and fees, must be repaid.

Proprietary reverse mortgages, offered by private lenders, are most common for people with very high home values.

Single-purpose reverse mortgages, sponsored by state or local governments or nonprofits, can only be used for a specific purpose like home repair or paying property taxes.

Here are the three types of reverse mortgages:

The right of rescission is a crucial option to consider when taking out a reverse mortgage. You have three days after closing to cancel the entire thing without incurring fees or penalties.

This option is only relevant in the short term, so think carefully about your decision. If you decide to cancel, the lender will have 20 days to return any already charged servicing fees and closing costs.

To cancel, you'll need to notify the lender in writing. This is an important step, so make sure to follow through.

You can pay back a reverse mortgage at any time, but you'll need to repay the loan in full if the last surviving borrower or eligible non-borrowing spouse dies, sells the home, or no longer lives in the home as their primary residence.

Most people repay the loan when the owner dies, since the majority of people who use reverse mortgages are those who already have a significant amount of home equity. However, you can also repay the loan if you stop paying homeowners insurance or property taxes on the home, or if you stop maintaining the home and it falls into disrepair.

You can pay off a reverse mortgage early by making payments on the loan ahead of time, which will also reduce the amount of interest you owe. Alternatively, you can pay a lump sum if you have the funds to do so, or refinance the reverse mortgage debt into a conventional loan.

If you or your heirs have enough savings, you can pay off the reverse mortgage loan balance with cash. The most you'll need to pay is 95% of the home's value.

Here are some common ways to pay back a reverse mortgage:

Keep in mind that if the reverse mortgage balance exceeds the home's appraised value, your heirs will not have to pay more than 95% of the appraised value.

Selling or refinancing a home with a reverse mortgage is a viable option when the loan comes due. You can sell the home and use the proceeds to pay back the loan. The FHA considers the loan terms satisfied if the home is sold for 95% of its appraised value. This means you or your heirs keep the difference if the home's value is greater than the loan balance.

If you're not ready to sell, you can refinance your reverse mortgage into a traditional mortgage loan. This will require making regular payments on the new loan to keep the home. Refinancing means keeping the house as part of your estate, but you'll need to start making payments again.

Here are the key takeaways to consider when deciding between selling and refinancing:

Selling your home is a common way to pay off a reverse mortgage. You can sell the home even if its value is lower than the loan's balance.

The Federal Housing Administration (FHA) considers the loan terms satisfied if you sell the home for 95 percent of its appraised value. This means you won't have to pay back more than 95% of the home's value.

If the value of your home is greater than the loan balance, you or your heirs will keep the difference after paying off the loan. The proceeds from the sale go first toward paying off the lender.

Here's what happens to the sale proceeds:

Selling your home can be a straightforward way to pay off a reverse mortgage.

You can refinance a reverse mortgage into a traditional mortgage, which means you'll start making monthly mortgage payments again. This will reduce the amount your heirs will owe to keep the home.

Refinancing a reverse mortgage into a conventional mortgage will also incur customary origination fees and closing costs, which you'll need to pay upfront. Be sure to consult with your lender to understand these costs.

You can refinance a reverse mortgage into a conventional loan by paying a lump sum upfront, or by refinancing the debt into a conventional loan. This will eliminate the need for monthly mortgage payments.

Refinancing a reverse mortgage can be a good option if you want to keep the home as part of your estate. However, it will also mean starting to make regular payments on the mortgage again.

You can pay off a reverse mortgage early by making payments on the loan ahead of time, which will also reduce the amount of interest you owe.

Paying off a reverse mortgage early can give you peace of mind and financial flexibility, especially if you've come into some extra funds.

The most straightforward way to pay off a reverse mortgage early is to make regular payments on the loan, which will reduce the balance and interest owed.

You can also pay off a reverse mortgage by paying a lump sum if you have the funds to do so.

Refinancing the reverse mortgage debt into a conventional loan is another option to consider.