Can you pay back a reverse mortgage early? Or are you locked in for life once the loan is complete? We’ll separate fact from fiction and explain your options for paying off your reverse mortgage early.
Before we dig into how to pay back a reverse mortgage, let’s first cover a few basics. There are many misconceptions circulating about reverse mortgages, so it’s important to set the record straight first.
What is a reverse mortgage?
The most popular reverse mortgage in the United States today is the federally-insured home equity conversion mortgage, or HECM. If somebody you know recently got a reverse mortgage, it likely was a HECM.
Congress created the HECM (often pronounced heck-um by industry professionals) as part of the Housing and Community Development Act of 1987, which was signed into law by President Ronald Reagan.
If you’re at least 62 and a homeowner, the HECM enables you to convert home equity into cash. You’re not required to pay back the reverse mortgage balance as long as at least one borrower (or non-borrowing spouse) lives in the home, maintains it, and pays the required property charges.
You always remain the owner of your home, which means you can leave it to your heirs. Your heirs can inherit any remaining equity in the home, whether they choose to keep the home or sell it.
The HECM is a non-recourse loan. That means that FHA will cover the shortage if you owe more than the home is worth at the time of repayment.
Again, you’re not required to pay back the reverse mortgage as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property charges. The idea is not to repay the balance in this lifetime, but you’re free to pay it back any time you like.
How can you pay back a reverse mortgage?
So, how can you pay a reverse mortgage back? The answer to that question depends on the circumstances surrounding the repayment. The following is a list of the most common scenarios:
- You’re still living in the home and you wish to repay the loan balance. This probably doesn’t make sense for most people, but it’s always an option. If you’re still living in the home and you want to repay the loan, you can. There’s no prepayment penalty or limitation on paying off a HECM.
- You no longer permanently live in the home. You’ll need to repay the reverse mortgage balance if you’re no longer permanently living in the home. Your options are to sell the home, refinance the balance, or pay off the balance with other funds.
- You wish to sell and move. Again, you’re not locked in when you have a reverse mortgage; you can still sell and move if you want to. In our opinion, a reverse mortgage is best for those who don’t plan to sell anytime soon, but you still can if you want to. The process works the same as if you had a regular “forward” mortgage. You hire a real estate agent, sell the home, pay back the reverse at closing, and pocket the remaining equity.
- All borrowers have passed away. In this case, your heirs have a few choices:
- Refinance the balance and keep the home.
- Sell the home, pay back the reverse mortgage from the proceeds, and keep any remaining equity.
- Let the lender sell the home and repay the reverse mortgage from the proceeds.
Again, a HECM is a non-recourse loan. The most that will ever be paid back is the value of the home. If your home isn’t worth enough to settle the entire balance, FHA will cover the shortage.
So, can you pay back a reverse mortgage whenever you like? Absolutely! Again, it’s just a home loan and there are no prepayment penalties. You’re free to pay off the balance whenever you like.