Can you pay back a reverse mortgage? If so, how do you pay off a reverse mortgage? We’ll cover the various options available, depending on the circumstances and your goals for the home.
Before we dig into the specific options of how to pay off a reverse mortgage, let’s cover some basics of how a reverse mortgage works. If you’re already familiar with the basics, feel free to skip further into the article.
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How A Reverse Mortgage Works
The most popular reverse mortgage in the United States is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders).
The HECM was created and signed into law by President Reagan as part of the Housing and Community Development Act of 1987. The Federal Housing Administration (FHA) insures and regulates the HECM under the authority of the Department of Housing and Urban Development (HUD).
A HECM reverse mortgage enables homeowners 62 and older to convert a portion of their home’s value into cash.
No mortgage payments are required as long as at least one borrower or non-borrowing spouse lives in the home, maintains it, and pays the property taxes, homeowner’s insurance, and HOA dues (if applicable).
You remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home, whether they choose to sell it or keep it.
The HECM reverse mortgage is a non-recourse loan, which means that FHA will cover any shortage if your home isn’t worth enough to pay off the entire balance.
A HECM is versatile and customizable; proceeds can be taken in the form of a line of credit, lump sum, term/tenure income, or some combination of these options.
How Do You Pay Back a Reverse Mortgage?
So, how do you pay off a reverse mortgage? Can you pay off a reverse mortgage early? As we’ve covered, a HECM is basically just a home loan, so it can be paid off in full at any time with no prepayment penalty. However, how you pay off a reverse mortgage depends on whether it’s your reverse mortgage or you inherited a home with a reverse mortgage on it.
If It’s Your Reverse Mortgage
Again, a reverse mortgage is just a home loan. You can pay off a reverse mortgage at any time without a prepayment penalty. If you have a reverse mortgage, here are the ways you can pay it back:
- Make one or more payments. A reverse mortgage doesn’t require a payment, but you can make one in any amount at any time. If you make payments on your reverse mortgage, they will first be applied to MIP, then servicing fees (if applicable), then interest, then any remaining portion of the balance.
- Sell your home. The process of selling your home works the same it would if you had a traditional “forward” mortgage. You hire a real estate agent, sell the house, then the reverse mortgage is paid off with the proceeds of the sale. There are no prepayment penalties.
- Pay it off with cash. You can pay off a reverse mortgage balance at any time with cash or any other liquid assets with no prepayment penalty. By the way, we don’t recommend paying the balance to zero because it will close out the reverse mortgage. We recommend paying it down to a very small balance of a few hundred dollars to maybe $1,000 (call your servicer to confirm the amount) so you can keep your line of credit open and growing.
- Refinance into another mortgage. A reverse mortgage is a home loan, so the process to refinance it works just like it would for any other home loan. You call a “forward” mortgage lender, get qualified for a loan that covers the reverse mortgage balance, then the reverse mortgage is paid off when you close on the new loan.
It’s also worth mentioning that interest on a reverse mortgage can be deductible as long as you pay it out of your pocket. If you pay more than $600 in interest, you will receive an IRS 1098 form to write off the interest on your income taxes. Of course, check with a qualified tax professional for tax advice specific to your situation.
If You’re the Heir of a Home That Has a Reverse Mortgage
What happens if you inherit a house with a reverse mortgage? How does it get paid back?
A HECM reverse mortgage becomes due and payable in full once the last borrower or non-borrowing spouse passes away. If you’re the heir of a home that has a reverse mortgage, you have a few different options to settle up the balance, depending on whether or not you wish to keep the home.
Once the servicer learns that all borrowers and/or non-borrowing spouses have passed, it will issue a Due and Payable notice to the heirs. The servicer may also order an appraisal to determine the current market value of the home. You can also request your own appraisal at your own expense.
You have several options to pay off a reverse mortgage on a home you inherited:
- Pay the lesser of the loan balance or 95% of the appraised value to keep the home. You can pay off the loan balance by refinancing or using other assets such as savings or life insurance proceeds.
- Sell the property, repay the balance, and keep the remaining equity. The sale process works just like it would with any other type of mortgage. You hire a real estate agent (or sell it yourself, if you prefer), sell the house, and repay the loan balance once the sale closes. Any remaining equity goes into the estate.
- Give the lender a Deed in Lieu of foreclosure. You can sign the deed over to the servicer and the servicer will sell the property and repay the loan balance.
- Do nothing. The lender will use the foreclosure process to sell the property and repay the loan balance.
HUD requires the lender to begin foreclosure proceedings if you do not repay the balance in response to the Due and Payable Notice. Foreclosure must begin within 90 days, but no sooner than 30 days after the issuance of the Due and Payable Notice.
It’s important to understand that foreclosure is not a done deal simply because the lender begins the process. Foreclosure can take months to settle, so HUD requires lenders to get a jump on the process. However, you still have time to sell the home yourself or pay off the reverse mortgage to keep the home.
There’s some conflicting information about the initial timeframe heirs have to pay off a reverse mortgage and keep the property. Some say the initial time window is 90 days, others say it’s six months. The ambiguity probably means servicers have some flexibility. The initial window is 90 days, but the servicer can likely work with you if you need a little more time to pay off the balance to keep the property.
If you plan to sell the home, you have an initial time window of six months. If you’re diligently trying to sell the home, but are unsuccessful, you can request up to two 90-day extensions to push back foreclosure. In other words, you could have as long as a year to sell the home before HUD requires the lender to foreclose.
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 a reverse mortgage at any time.
Do You Have to Pay Back a Reverse Mortgage?
A HECM reverse mortgage has to be paid back only if you’re the heir of a home that has one. A reverse mortgage is only for the borrowers or non-borrowing spouses on the original loan application. Once all borrowers and non-borrowing spouses are no longer living in the home and paying the property taxes, homeowner’s insurance dues, and HOA dues (if application), the reverse mortgage becomes due and payable in full.
If you’re a homeowner who has a reverse mortgage, you’re not required to pay it back as long as you remain in good standing.
Frequently Asked Questions
How do you pay the interest on a reverse mortgage?
To pay the interest, you simply make one or more payments on the balance. However, it’s important to understand that the payments will first be applied to MIP, then servicing fees (if applicable), then interest, then any remaining portion of the balance.
What happens when you pay down a reverse mortgage loan?
The payments will first be applied to MIP, then servicing fees (if applicable), then interest, then any remaining portion of the balance.
How do you pay off a reverse mortgage?
You can make payments on it, sell your home and pay it off with the proceeds of the sale, pay it off with your own cash, or refinance it with another home loan.
Can you ever pay off a reverse mortgage?
Absolutely! A reverse mortgage is simply a home loan; you can repay a reverse mortgage in full at any time with no prepayment penalty.
Can a reverse mortgage be refinanced?
Absolutely! A reverse mortgage is simply a home loan, so it can be refinanced like any other home loan. You can refinance it into a new reverse mortgage to reduce your rate and/or get more cash, or you can refinance it into a “forward” mortgage with a monthly payment.
