How To Get Out of a Reverse Mortgage
Author: Lauren Nowacki at Rocket Mortgage
A reverse mortgage can be a helpful financial tool in retirement. However, it’s a complicated loan that isn’t the right solution for everyone. Even those who did their due diligence in understanding how a reverse mortgage works may still not know how to get out of the loan if they need to.
If you’re considering a reverse mortgage or are looking for a way out, read on to learn more about creating an exit strategy if and when you need it. [Many Mortgage Providers do not offer reverse mortgages, but . . . it’s important to offer educational information so you’re aware of all your options.
When Does the Reverse Mortgage Need to Be Paid?
You may not be required to make monthly payments on your reverse mortgage, but the loan will come due eventually and you will need to pay it back. A reverse mortgage must be repaid:
When the borrower passes away.
When the borrower no longer resides in the home or the home is no longer their primary residence.
When the borrower sells the home or transfers the house title.
If the borrower doesn’t uphold their loan obligations, including paying their property taxes and homeowners insurance.
How Do You Pay Back a Reverse Mortgage?
A reverse mortgage is commonly paid back by using the proceeds from the sale of the home. If the loan comes due because you’ve passed away, your heirs will be responsible for handling the repayment and will have a few options for repaying the loan:
Sell the home and use the proceeds to repay the loan.
Refinance into a traditional mortgage or use their finances to purchase the home for the amount due on the loan or 95% of the appraised value of the home – whichever is less.
Sign the title over to the lender and walk away from the loan.
Can You Get Out of a Reverse Mortgage?
If you want to get out of a reverse mortgage, there are a few ways you may do so. When it comes to deciding which option is best for you, consider your goals and your financial situation. Some options may come with costs and others may require a lifestyle change – like moving out of the home. When considering your options, it may be best to speak to a financial advisor or a reverse mortgage counselor who is approved by the Department of Housing and Urban Development (HUD).
Reasons For Exiting a Reverse Mortgage
There may be personal or financial reasons someone would want to get out of a reverse mortgage. Some common reasons include:
You may need to move into a nursing home or assisted living.
You have “buyer’s remorse.”
You realize your reverse mortgage proceeds aren’t enough to stay current with your homeowner’s insurance, property taxes and home maintenance costs.
You’ve decided you want to leave the home to your heirs and don’t want them to have to purchase it.
You live with someone who is not on the loan, and they could be kicked out of the home if you pass away or move out.
You no longer need the financial assistance of a reverse mortgage to supplement your income or make repairs to the home.
Whatever your reason, know that you have options. Taking the time to consider why you want out of this type of loan will help you choose the right way to do so.
5 Ways to Get Out of a Reverse Mortgage
Before getting into a reverse mortgage, make sure you understand how the loan works, the pros and cons of getting a reverse mortgage and what your financial responsibilities will be – including paying for closing costs, paying insurance and property taxes and paying back the loan. You’ll also want to make sure that you know what alternatives you have. Reverse mortgage counseling will cover all of these things, which is why it’s required for the HECM.
If, after all of this careful consideration, you get a reverse mortgage and find that you no longer want the loan, here are five common ways to get out.
1. Use Your Right of Rescission
Reverse mortgages have a 3-day period directly after you close on your loan in which you can cancel the transaction with no penalty. This is known as the right of rescission and it allows you to change your mind should you have buyer’s remorse right after you sign the closing documents. Within 20 days, the lender will return all fees, closing costs and unused funds paid by the borrower.
If you decide to practice your right of recission, you will need to inform your lender in writing. Remember, this window of time lasts up to only 3 days after you close. After that, you cannot cancel your loan without penalty.
2. Sell the House
One of the easier ways to get out of a reverse mortgage is to sell the house and use the proceeds from the sale to pay off the loan. Depending on what you owe, you’ll keep any of the remaining sale proceeds after you pay off the loan. So, if you owe $150,000 on the loan and sell the home for $200,000, you’ll pay off the loan first, then keep the remaining $50,000.
What happens if you owe more than the home is worth? HECMs are what’s known as non-recourse loans, meaning that you’ll never owe more than your home is worth. If you sell your home for less than what’s owed on the loan, FHA insurance will pay the difference.
3. Pay It Back with Your Own Funds
When it comes to paying back the loan, you’ll need to pay back the amount you borrowed plus any interest that has accrued on that amount. If you wish to stay in your home and don’t want to sell it, you’ll need to pay back the loan out of pocket. That may mean drawing from your savings to pay it off in one lump sum or creating a payment plan in which you make several payments to finish it off. This may require you to start making monthly payments on the loan and setting up a new budget to make those payments.
4. Refinance the Reverse Mortgage
Perhaps it isn’t the reverse mortgage you want to get out of, but the specific terms of your reverse mortgage that are the problem. If that’s the case, you could consider refinancing your current reverse mortgage into one with better terms. If interest rates are lower than when you first got your loan or your home’s value has increased, you could refinance into a new reverse mortgage. This could give you a better interest rate, change to an adjustable rate to a fixed rate, help you pay your loan off faster or provide access to more equity.
Keep in mind that you’ll need to pay closing costs for a refinance.
5. Take Out a New Loan
Another refinancing option is to refinance the reverse mortgage into a conventional loan. The loan will pay off your reverse mortgage and you’ll go back to making monthly mortgage payments. This can help you preserve and grow the equity in your home and helps your heirs avoid any reverse mortgage-related problems if you pass away. Again, keep in mind that there are closing costs associated with this type of refinance and you’ll need to make monthly payments on your loan. Before choosing this option, make sure you can afford it.
The Bottom Line:Even after educating yourself on reverse mortgages and considering the pros and cons and carefully choosing to get the loan to achieve your goals, you may find yourself wanting to get out of your reverse mortgage. If that’s the case, you have multiple options, including selling your home, using your own funds to pay it back or refinancing to pay off the loan or get better terms. If you change your mind within days of closing your loan, you may be able to simply cancel the loan without penalty. The best option for you will depend on how long you’ve had the loan, what you want to do with your home and what you can afford. If you’re thinking about getting a reverse mortgage, learn more about the other different types of mortgage loans available to you as an alternative option.