How Do You Pay Back a Reverse Mortgage?
A reverse mortgage is a type of loan for homeowners aged 62 or older, allowing them to access some of their home equity without monthly mortgage payments. The most common repayment method for a reverse mortgage is through the sale of the home. However, there are other repayment options and details to consider when it […]
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A reverse mortgage is a type of loan for homeowners aged 62 or older, allowing them to access some of their home equity without monthly mortgage payments. The most common repayment method for a reverse mortgage is through the sale of the home.
However, there are other repayment options and details to consider when it comes to paying back a reverse mortgage, which we’ll explore below. From refinancing the loan to using personal funds, understanding these repayment options is crucial for borrowers and their heirs.
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How does repayment on a reverse mortgage work?
Repayment on a reverse mortgage occurs when the borrower no longer occupies the home as their primary residence. Unlike traditional mortgages or home equity lines of credit, where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender pays the borrower.
A primary benefit of a reverse mortgage is that it allows homeowners aged 62 or older to access the equity in their homes without increasing their monthly debt obligations or needing to sell the home and move.
A maturity event requiring a reverse mortgage to be repaid is typically triggered by one of the following events:
- The borrower’s death
- The sale of the property
- The home is no longer the borrower’s primary residence
In the case of death, the borrower’s heirs or estate typically handle repayment by selling the home to settle the debt. Excess proceeds from the sale of the property above the loan amount go to the borrower’s estate or heirs.
A critical distinction of a reverse mortgage is the lack of monthly mortgage payments. Instead, the accrued interest each month is added to the total principal amount owed, and repayment is not required until a maturity event occurs. The borrower makes no monthly payments.
Repayment of a reverse mortgage is required within a certain time frame, usually 30 days from receiving a notice from the lender that repayment is required. However, this could be extended to six months after the borrower’s departure from the home.
Reverse mortgages are complex financial products, and it’s crucial to understand the terms, conditions, and potential risks before entering into one. We recommend consulting with a qualified financial professional or housing counselor.
Our expert explains: The effect of changing interest rates
As interest rates rise, the amount you can borrow goes down. Because your age and interest rate fluctuations have a direct impact on the loan balance, it’s best to understand your needs and payment options so you can decide whether a reverse mortgage makes sense sooner rather than later.
Reverse mortgage repayment options
The most common reverse mortgage repayment options include selling the property, refinancing the reverse mortgage, or paying off the mortgage balance with other funds.
The choice of repayment option depends on the borrower’s and their family’s circumstances. It’s important to consider all the options and choose the one best suited to your situation. You can click the repayment option in the table below to find out more about who it’s best for—or keep reading to see more about all three.
| Repayment option | Best for |
| Sell the home | When borrower permanently moves out |
| Refinance the mortgage | When heirs want to keep the property after the borrower vacates |
| Pay off the mortgage with other funds | When the borrower or heirs have sufficient funds from other sources |
Sell the home
When the borrower moves out of the home, selling the property is the most common repayment option for a reverse mortgage.
Once the borrower no longer occupies the home as their primary residence, the property is typically sold to settle the reverse mortgage debt. They use proceeds from the sale to repay the loan balance.
This repayment option is best when the borrower moves into a long-term care facility, passes away, or decides to relocate. It allows the borrower, their heirs, or their estate to settle the debt by selling the property.
The responsibility for selling the property and repaying the loan falls on the borrower, their heirs, or their estate. Any remaining equity after repayment belongs to these parties, not the lender.
Refinance the mortgage
When the heirs want to keep the home after the borrower no longer occupies the property, refinancing the reverse mortgage may be a suitable repayment option.
Refinancing involves obtaining a new loan to pay off the reverse mortgage. Heirs or other interested parties can apply for a new loan to settle the debt and retain ownership of the property.
This option is best when heirs intend to keep the property in the family or the property has appreciated in value, making it financially advantageous to refinance.
The responsibility for refinancing and repaying the loan falls on the heirs or other parties interested in retaining ownership of the property. These parties are responsible for securing a new loan to settle the reverse mortgage debt.
Pay off the mortgage with other funds
When the borrower or heirs have sufficient funds, repaying the reverse mortgage may be an appropriate choice.
The borrower or their estate can use personal savings, investments, or other assets to repay the reverse mortgage debt in full. This option eliminates the need to sell the property or refinance the loan.
Paying off with other funds is best when the borrower or their estate has ample resources to settle the debt without selling or refinancing the property.
The responsibility for repaying the loan falls on the borrower or their estate. They use their own funds to settle the reverse mortgage debt without involving a sale or refinancing process.
How long do your heirs have to repay a reverse mortgage?
Your heirs often have up to six months to repay a reverse mortgage after your passing or the property is no longer your primary residence. However, your heirs will need to pay close attention to the lender’s required time frames and ask for an extension if necessary.
Once the borrower passes away or moves out of the home, the reverse mortgage becomes due. The lender notifies the heirs of the outstanding balance and provides options for repayment.
You can expect the lender notification to require full repayment in 30 days. However, you can often extend it to six months. The goal is to give your heirs time to work out payment arrangements, such as selling the home, refinancing the loan, paying it off with cash, or giving the home to the lender.
Given the initial demand for payment is so short, it’s crucial for your heirs to contact the lender right away to work out arrangements. They may also find it helpful to speak with a housing counselor or an attorney to ensure they understand what’s required.
Living in a long-term care facility, such as a hospital or nursing home, for more than 12 months in a row counts as permanently vacating the home. Be sure your heirs are aware that repayment in full on your reverse mortgage will be triggered once this happens.
Should you repay your reverse mortgage early?
Paying off a reverse mortgage early may make sense in certain situations, particularly if you want to reduce interest costs or preserve equity for your heirs. However, it’s essential to consider your financial circumstances and long-term goals before deciding.
You may want to consider early repayment if:
- You have sufficient funds to do so and want to minimize interest accrual. Unlike a traditional mortgage, the balance on your reverse mortgage continues to increase. Because you aren’t making payments, interest charges are added to your loan balance each month, further reducing your home equity.
- You intend to leave the property to your heirs and want to preserve equity. If you aren’t going to leave your home to your heirs—or you don’t have much equity—you might not be concerned with the mortgage balance growing. But you may want to repay it early if this concerns you.
By paying off the loan early, you can avoid accumulating additional interest over time, which can save a significant amount of money. Early repayment also eliminates the risk of burdening your heirs with the responsibility of settling the reverse mortgage debt after your passing.
Before deciding to repay early, assess your overall financial situation, including your retirement savings, investment portfolio, and other liabilities.
Repaying a reverse mortgage early can offer certain advantages, such as reducing interest costs and preserving equity for heirs, but it’s essential to weigh your options and consider your long-term financial goals before deciding.
Consulting with a financial professional, housing counselor, or attorney may be a good way to help you determine whether early repayment is the right choice for you.
Our expert’s take
It’s important to understand the different payment options available with a reverse mortgage. Certain options give you faster and easier access to your home equity, which can come with significant risk. Knowing your needs and having a plan for how you will use the money beforehand is crucial so you can reduce the risk of running out of money.
FAQ
Who is responsible for paying off a reverse mortgage?
The borrower or their heirs are responsible for paying off a reverse mortgage. Ideally, the loan is repaid through the sale of the home, with an appraisal determining the home’s value upon the borrower’s death or if they move. Provided the loan balance is less than the appraised value, any remaining equity is paid to the borrower or their estate.
Are there tax implications to repaying a reverse mortgage?
There can be tax implications upon repaying a reverse mortgage. The principal and interest on a reverse mortgage are not taxed as income. However, if the house sells for more than what’s owed, the excess might result in capital gains tax. It’s best to consult a tax professional to understand the possible implications for individual situations.
What if I can’t repay my reverse mortgage?
If you’re unable to repay your reverse mortgage, certain protections exist. The reverse mortgage is a non-recourse loan, meaning the lender’s recovery is limited to the home’s value. Your retirement accounts, income, or other assets are shielded. If the sale of the home isn’t enough to repay the loan, the lender absorbs the difference.
Do you have to make monthly payments on a reverse mortgage?
You do not need to make monthly payments on a reverse mortgage. Instead, the interest is added to the loan balance each month, and the total amount is due when the last borrower leaves the home. If you choose to make payments to manage the loan balance, you can pursue flexible repayment options with the lender.
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