How to pay off a reverse mortgage
A reverse mortgage can allow seniors to stay in their homes and supplement their retirement income. Although you receive a constant influx of money with a reverse mortgage, it is ultimately a loan that needs to be paid off. How do you pay off a reverse mortgage and when is it necessary? Here’s what you need to know.
How Does a Reverse Mortgage Work?
A reverse mortgage allows seniors to borrow against the equity in their home. Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage, are available to homeowners aged 62 and over. With a reverse mortgage, instead of the borrower making monthly payments like with a mortgage, home equity loan, or line of credit (HELOC), the borrower receives monthly payments from their mortgage lender.
“You already have a house and the mortgage lender makes monthly payments so that they can get your house back after you die,” says Tabitha Mazzara, director of operations at MBANC, a mortgage lender.
That said, reverse mortgage borrowers or their heirs can choose to pay off the debt.
To protect the borrower and potential heirs, lenders are required by law to structure reverse mortgages so that the loan amount does not exceed the value of the property – and if the borrower dies, the estate does not. will not be required to pay the difference if the loan ends up being more than the value of the home. This can happen if house prices drop sharply or if the borrower lives longer than expected.
When should you pay off a reverse mortgage?
A reverse mortgage must be repaid in full if the last surviving borrower or qualifying non-borrowing spouse:
- Sell the house
- No longer lives in the house as a primary residence
The latter scenario can occur if the borrower moves into an assisted living facility, moves in with their family, or downsizes.
“Most people pay off the loan when the homeowner dies because the majority of people who use reverse mortgages are those who already have significant equity in their home,” says Cliff Auerswald, president of All Reverse Mortgage, a lender. reverse mortgage.
There are other situations, however, where the loan might need to be repaid sooner. This can happen if the borrower stops paying home insurance or property taxes on the house, or if they stop maintaining the house and it falls into disrepair.
How long do heirs have to pay off a reverse mortgage?
If the last surviving borrower or the non-borrowing spouse eligible for a reverse mortgage dies, the onus is on the estate and heirs to repay the debt.
According to federal regulations, heirs are required to repay the entire loan balance or 95% of the appraised value of the home, whichever is less. The lender will usually provide the heirs with repayment options, after which they will have 30 days to make a decision. Depending on where you live, you may have more time to repay the loan.
“The exact timing is usually decided by the state,” says Auerswald. “Most reverse mortgages are due within one to six months of the owner’s death. “
Can a parent pay off a reverse mortgage?
Anyone can pay off a reverse mortgage, including the borrower, their spouse, heirs, or other family members. This is more common in scenarios where the last surviving borrower or qualifying non-borrowing spouse dies and the heirs choose to repay the loan.
How do you pay off a reverse mortgage?
There are several ways to pay off a reverse mortgage. The following options include how to pay off a reverse mortgage early or at maturity:
1. Sell the house
If you, as the borrower or your heirs, don’t want to keep the house, you (or them) can simply sell it to pay off the reverse mortgage. If there are additional products in addition to the loan amount and transaction fees, you (or them) can keep them.
The borrower or heirs can also do this if the house ends up worth less than the loan amount because its value has gone down. The Federal Housing Administration (FHA), the agency that supports HECMs, considers the terms of the loan to be met if the borrower or heirs sell the house for 95% of its appraised value.
2. Refinance the mortgage
If you are the borrower and want to move out while keeping the house, you can refinance your reverse mortgage into a traditional mortgage. Keep in mind that you will need to start making payments on the new loan to keep the house.
“Refinancing it to a traditional loan will mean having to make regular mortgage payments again,” says Mazzara, “but that would also mean keeping the house as part of your estate.”
3. Take out a new mortgage
If the borrower’s heirs wish to keep the house, they can simply take out a new mortgage on the house to pay off the balance of the reverse mortgage. They can then choose to live in the house or use it as an investment property.
4. Provide a deed in lieu of foreclosure
If the borrower or the heirs do not meet the repayment conditions, the lender can choose to seize the property and sell it to recoup its losses. One way to avoid this process is to provide the lender with the deed of property so that they do not have to proceed with foreclosure, an action known as a deed in lieu of foreclosure.
At the end of the line
Whether you are the reverse mortgage borrower or an heir trying to settle a reverse mortgage after the death of a loved one, take the time to consider your options before making a decision. It would be wise to consult with a financial advisor or real estate attorney to determine whether to keep the house or just sell it and pay off the debt.