How to Pay Back a Reverse Mortgage

What Is a Reverse Mortgage?

A reverse mortgage is a type of loan that allows older homeowners to convert some of their home equity into cash payments. Most reverse mortgages are home equity conversion mortgages (HECMs), which are backed by the U.S. Department of Housing and Urban Development (HUD).

When you take out a reverse mortgage, the lender first pays off the balance on your current home loan. Then the lender sends you the rest of the proceeds in a lump sum, in a line of credit or through monthly payments.

Repaying the loan doesn't involve making monthly payments to the lender, as you would with a traditional mortgage. Instead, the entire reverse mortgage balance is due under certain conditions, outlined below.

Learn more: The Pros and Cons of a Reverse Mortgage

When Are You Required to Pay Back a Reverse Mortgage?

The entire balance on a reverse mortgage is due after some type of trigger event. These situations include:

• Borrower's death: The reverse mortgage is due when the last surviving borrower dies. With an HECM, the heirs typically have 30 days to buy, sell or turn the home over to the lender.
• Relocation: When the borrowers no longer use the home as their primary residence, they'll need to repay the reverse mortgage. This may happen if the borrowers enter an assisted living facility, move in with family or move to a new property.
• Home sale: The last surviving borrower, eligible non-borrowing spouse or heir will need to repay the reverse mortgage if they decide to sell the home.
• Loan obligations: The reverse mortgage may come due if the homeowner fails to meet their loan obligations, such as maintaining the home, paying property taxes and keeping up with homeowners insurance.

How to Pay Back a Reverse Mortgage

There are several ways to pay back a reverse mortgage. Here are your primary options:

Sell the Home

You or your heirs can sell the home and use the funds to pay back the lender for the reverse mortgage. If the value of the home is greater than the loan balance, you keep the difference after the home sale.

A key benefit of an HECM is that borrowers never have to pay back more than 95% of the appraised value of the home. So if the value of the home is less than the amount you owe, you'll use the sale proceeds to pay back part of the loan. Mortgage insurance will cover the rest.

Refinance Into a Traditional Mortgage

If you or your heirs want to keep the home but don't want to live in it, the reverse mortgage can be refinanced into a traditional mortgage loan. The new loan will pay off the reverse mortgage balance.

The borrower—which is you or your heirs—will need to go through the underwriting process, which typically involves meeting minimum credit score and debt-to-income ratio (DTI) requirements. The lender will also check the amount of equity in the home.

After you refinance, you'll need to make regular payments on the new loan in order to keep the home.

Learn more: How Does Refinancing Affect Your Credit Score?

Leverage the Right of Rescission

Most reverse mortgages can be canceled within three days of you signing the closing documents. Within this time frame, you may cancel the transaction for any reason without penalty. This is known as your right of rescission.

To cancel the reverse mortgage, you'll need to notify your lender in writing. Sign and submit a letter by certified mail, and ask for a return receipt.

The lender must return any money you've paid for processing the reverse mortgage within 20 days. If you received money in the transaction, you'll need to return the funds to the lender.

Use a Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an arrangement where a borrower hands the deed over to the lender along with the keys—effectively forfeiting the home.

Borrowers may choose this option when they can't keep up with the home maintenance, taxes and insurance payments, or they want to move out of the home but can't sell it. This strategy allows both the borrower and lender to avoid a costly foreclosure process.

Talk with a housing counselor or foreclosure attorney before moving forward. If you decide to go this route, the deed in lieu of foreclosure will impact your credit. But the effect is usually less severe than foreclosure.

Pay It Back With Your Own Funds

You may also pay off a reverse mortgage balance with your own funds. Your heirs have this option too. This is a simple and straightforward option if you have enough cash on hand.

In most cases, you can do this at any time without a prepayment penalty.

To pay off the reverse mortgage, contact the lender and ask about the process. You may be able to chip away at the balance through a series of payments or pay it off in one lump sum.

Should You Get Out of a Reverse Mortgage?

Getting out of a reverse mortgage isn't always easy or smart. However, it may be a wise move in the following situations:

• Your financial situation has improved. If you no longer need the payments a reverse mortgage provides, you might decide to get out of the loan.
• You're planning to move soon. You may also decide to pay off the reverse mortgage if you need or want to permanently move to another location.
• You plan on leaving the home to heirs. A home is a major asset that you might want to keep in the family after you die. In this case, it could make sense to exit the reverse mortgage.

Frequently Asked Questions

The Bottom Line

A reverse mortgage is one way to utilize the equity in your home to free up cash for needed expenses. If you're hesitant about getting a reverse mortgage or don't qualify for one, you may want to consider a cash-out refinance, home equity loan or home equity line of credit.

To qualify for these options, you'll need good credit. Check your credit report and FICO^® Score^☉ for free from Experian to see where you stand, and take steps to improve your credit if necessary.