Reverse mortgages allow older homeowners to tap into their home equity without having to make monthly mortgage payments. But what happens when you want to get out of a reverse mortgage loan? This comprehensive guide will walk you through the ins and outs of repaying a reverse mortgage, alternatives to consider, and steps you can take if you want to cancel the loan.
A reverse mortgage can provide retirees with extra income to cover expenses in retirement. However, these specialized loans come with unique rules and regulations around repayment. It’s important to understand how reverse mortgages work if you are considering taking one out or want to get out of an existing loan.
In this guide, we will cover:
- How Does a Reverse Mortgage Work?
- Do You Have to Pay Back a Reverse Mortgage?
- When Does a Reverse Mortgage Have to Be Repaid?
- How to Pay Off a Reverse Mortgage
- Refinancing a Reverse Mortgage
- Alternatives to Reverse Mortgages
- Steps to Cancel a Reverse Mortgage
- FAQs About Getting Out of a Reverse Mortgage
Understanding the ins and outs of a reverse mortgage loan will empower you to make the right decisions if you want to repay your loan or get out of the reverse mortgage entirely. Let’s dive in!
Key Takeaways: How to Get Out of a Reverse Mortgage
- Exercise Your Right to Rescission: Act quickly within three days of closing to cancel the loan without penalties.
- Refinance for Better Terms: Explore refinancing options to secure a more favorable rate and term.
- Pay Off the Loan: Consider selling the house and using the proceeds to pay off the reverse mortgage. If needed, open a conventional loan to settle the balance.
- Surrender the Deed as a Last Resort: If all else fails, surrendering the deed may be an option to break free from the reverse mortgage.
- Open Communication with Your Lender: Keep the lines of communication open with your lender and review long-term plans for potential alternatives.
- Consider the Costs: Be mindful of the costs associated with exiting a reverse mortgage, including closing costs and fees.
Remember, the most suitable option depends on your unique circumstances. Seeking guidance from, and getting HUD-approved mortgage counseling, can be a valuable resource to make informed decisions.
What is a Reverse Mortgage?
Let’s start by reviewing what a reverse mortgage is and how these specialized loans work.
A reverse mortgage is a type of home equity conversion loan that allows homeowners aged 62 and older to convert a portion of their home’s equity into cash. The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
Unlike a traditional forward mortgage where the borrower makes monthly payments, with a reverse mortgage the lender makes payments to the borrower. It works like this:
- The borrower receives funds in a lump sum, line of credit, monthly payouts, or a combination.
- Meanwhile, the loan balance grows over time as interest accrues.
- The loan comes due to be repaid when the borrower dies, sells the home, or moves out permanently.
Understanding how reverse mortgages work is key to evaluating your options if you later want to get out of the loan.
Types of Reverse Mortgage
There are several varieties and types of reverse mortgages available, each with their own characteristics:
Single-Purpose Reverse Mortgages
Offered by government and nonprofit groups, these loans can only be used for specific purposes like home repairs or paying property taxes. They are the least common type.
Home Equity Conversion Mortgages (HECMs)
HECMs are the most popular type of reverse mortgage, insured by the FHA. They provide flexible access to home equity for various uses. HECMs have eligibility requirements and must be obtained through approved lenders.
Proprietary Reverse Mortgages
These private reverse mortgages are provided by individual lenders without FHA insurance. They allow borrowers with higher home values to tap into more of their equity.
Single-Purpose Programs
Some state and local agencies offer single-purpose reverse mortgages just for certain expenses like renovations or medical bills. These are government-backed programs.
The right reverse mortgage product depends on your financial situation, equity, and how you intend to use the funds. Consult with a housing counselor to understand the differences and determine the optimal type for your needs.
How Does a Reverse Mortgage Work?
Before we discuss how to get out of a reverse mortgage, let’s review how these unique home loans work.
A reverse mortgage, also known as a home equity conversion mortgage, allows homeowners aged 62 and older to tap into their home equity without taking on a new monthly mortgage payment. Instead of making payments, the lender pays you – either through a lump sum, monthly payouts, or a line of credit.
With a traditional mortgage loan, you make monthly payments to pay down the loan principal and interest. With a reverse mortgage, the lender pays you and your loan balance grows over time as interest and fees accrue.
The loan must be repaid when the borrower dies, sells the home, or no longer lives in the home as their primary residence. At that point, you or your heirs can either repay the loan in full or sell the home to satisfy the loan.
Now that you understand the basics, let’s look at your repayment obligations and how to get out of a reverse mortgage if needed.
Consumer financial protection bureau (CFPB)
Here is a draft section on getting out of a reverse mortgage based on the background information provided:
Options for Getting Out of a Reverse Mortgage
If you currently have a reverse mortgage but are looking to get out of it, there are several options to consider. The best choice depends on your financial situation and goals.
Exercise Your Right of Rescission
If you recently originated a reverse mortgage, you may be able to exercise your right of rescission and cancel the loan. This right allows you to rescind the mortgage with no penalties within 3 business days of closing. Acting quickly is key – contact your lender immediately if you wish to cancel under right of rescission.
Refinance the Loan
Another option is refinancing into a new mortgage on better terms. You may qualify to refinance into a lower rate reverse mortgage or potentially a traditional forward mortgage. Refinancing enables you to pay off your current reverse loan while maintaining home ownership. Compare costs of refinancing to projected savings to see if it makes financial sense.
Pay Off the Full Balance
To fully get out of a reverse mortgage, you can pay the outstanding loan balance including all interest and fees. Sale of the home is the most common way to obtain funds to cover the payoff amount. You may also opt to pay the balance in cash if you have sufficient assets.
Open a Conventional Loan
If selling the home is not an option, you may be able to take out a traditional mortgage to pay off the reverse loan. This leaves you with monthly payments but enables you to stay in your house. You must qualify based on income, credit, and other factors to obtain a forward mortgage.
Surrender the Deed
As an absolute last resort, you can surrender or transfer the deed to get out of the reverse mortgage. This signs the property over to the lender to satisfy the debt in exchange for no longer being responsible for the loan. You would have to vacate the home.
Communicate with Your Lender
It’s wise to communicate with your reverse mortgage lender about your intentions. Let them know if you are looking to refinance, sell, or explore other options to satisfy the loan. They can explain the specific processes required to meet your goals.
Consider All Costs
Each option for getting out of a reverse mortgage has associated costs, like refinancing closing costs or sales commissions if selling. Estimate all expenses to determine the most cost-effective route based on your financial situation and objectives.
Consulting a financial advisor or HUD counselor can provide guidance on making the optimal decisions based on your circumstances. Carefully evaluate all alternatives before moving forward.
Here is a step-by-step guide on getting out of a reverse mortgage loan:
Walk Away From a Reverse Mortgage : Step-by-Step Guide to Getting Out of a Reverse Mortgage
Getting out of a reverse mortgage loan requires carefully evaluating your options and developing a plan. Here is a step-by-step process:
Getting Out of a Reverse Mortgage
1. Review Potential Options
Start by reviewing the different ways to satisfy a reverse mortgage, like paying off the balance or refinancing. We covered the main alternatives in the previous section, so refer back to that for an overview.
2. Assess Your Financial Situation
Take stock of your current financial standing, including income, debts, assets, and home value. This will influence which option is most viable based on your capabilities.
3. Act Quickly if Recently Originated
If you just closed on the reverse mortgage, act within the right of rescission period to cancel penalty-free. Contact the lender immediately about cancelling.
4. Explore Refinancing
Look into the possibility of refinancing into a more favorable reverse mortgage or potentially a conventional forward mortgage. Compare costs against potential savings.
5. Pay Off the Balance
Selling the home and using proceeds to repay the loan in full is one direct way out. If unable to pay lump sum, take out a traditional mortgage to pay it off.
6. Surrender the Deed
As an absolute last resort, you can surrender the deed to satisfy the loan in exchange for releasing ownership of the property.
7. Communicate with Lender
Stay in close contact with your reverse mortgage lender throughout the process. Keep them informed on your plans and ask questions.
8. Factor in All Costs
Closing costs, commissions, and other expenses should be included in your decision. Weigh costs against your goals.
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With a plan tailored to your situation, you can methodically take steps to get out of the reverse mortgage loan. Consult professionals for guidance along the way.
Do You Have to Pay Back a Reverse Mortgage?
An important question many reverse mortgage borrowers have is – do you have to pay back a reverse mortgage?
The short answer is yes, all reverse mortgage loans must eventually be repaid in full. Here are some key facts on repayment:
- You are not required to make monthly payments on a reverse mortgage.
- However, the loan balance including all interest and fees must be repaid at some point.
- Repayment is triggered when you sell the home, pass away, or permanently move out.
- If the balance isn’t repaid, the lender can foreclose on the property to recover amounts owed.
So while you do not make ongoing payments, the reverse mortgage accrues interest and must be satisfied when you sell, die, or move out of the home. Failing to repay can result in foreclosure.
Pay Off a Reverse Mortgage: When Does a Reverse Mortgage Need to be Repaid?
Knowing when a reverse mortgage becomes due is important in determining when you need to repay the loan:
- Sale of the home – If you sell the property while you have an active reverse mortgage, proceeds must pay off the balance.
- Death of the borrower – Upon death, the loan must be satisfied by heirs before passing the home.
- Permanent move-out – These loans require you to stay in the home as your primary residence. Moving out triggers mandatory repayment.
- End of loan term – Most reverse mortgages have a set term such as 30 years. At term end, the balance must be paid.
As long as you keep living in the home, you can defer repayment. But circumstances like those above make the reverse mortgage payable.
How Can I Pay Off My Reverse Mortgage?
When you wish to repay your reverse mortgage, either voluntarily or due to a triggering event, here are some options:
- Refinance into a traditional mortgage – Take out a new forward loan to pay off the reverse mortgage, enabling you to keep the home.
- Sell the property – This is the most common method. Use sale proceeds to satisfy the reverse mortgage balance.
- Make a lump sum payoff – If you have sufficient assets, repay the full balance owed in one payment.
- Draw available funds – An unused line of credit associated with the loan can provide payoff funds.
- Use life insurance – Some borrowers take out a life insurance policy to cover repayment upon death.
Be sure to review your loan agreement for any prepayment penalties or restrictions before deciding how to satisfy the loan.
How To Pay Off A Reverse Mortgage
Should I Refinance My Reverse Mortgage?
Some borrowers consider refinancing as a way to get out of an existing reverse mortgage. Here are two main options:
- Reverse mortgage refinance – In some cases, you may qualify to refinance into a new reverse mortgage to improve terms or interest rate.
- Forward mortgage refinance – You can potentially refinance into a traditional mortgage with monthly payments if you meet qualification requirements.
Before refinancing, compare closing costs against potential savings to see if it makes financial sense. Consult with a loan officer to assess your specific situation.
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What are Some Alternatives To a Reverse Mortgage Loan?
Rather than take out a reverse mortgage, be sure to consider alternative ways to supplement retirement income or access home equity:
- Downsize – Selling and moving to a smaller living space can unlock equity without monthly payments.
- Home equity loan – Borrow against equity while retaining ownership of the property.
- Budget adjustments – Reduce discretionary spending wherever possible to free up cash flow.
- Home improvements – Adding a rental unit or renovating can boost income potential.
- Government programs – Research grants, tax relief options, and aid programs that may assist.
These options allow you to tap home equity without committing to a complex reverse mortgage loan.
Can I Cancel a New Reverse Mortgage?
If you’ve recently been approved for a reverse mortgage but now want to cancel, here are some steps to try:
- Act within the right of rescission period – You typically have 3 days to cancel penalty-free.
- Contact the lender immediately – Discuss options like repaying the loan or short sale.
- Review loan terms – Check for any early cancellation policies.
- Seek legal counsel – Consult an attorney experienced with reverse mortgages.
- Sell the property – This satisfies the loan while cancelling the reverse mortgage.
Acting quickly is key if you wish to rescind the reverse mortgage. Timeliness is critical throughout the cancellation process.
Frequently Asked Questions About Getting Out Of a Reverse Mortgage
Can you just walk away from a reverse mortgage?
No, even if you default the loan must be repaid. The lender can foreclose on the property to recover the balance owed.
How can I stop a reverse mortgage after starting it?
To stop a recently originated reverse mortgage, immediately contact the lender within the right of rescission period. Repaying the loan or short sale may cancel it.
Do heirs have to pay back a reverse mortgage after death?
Yes, after the borrower dies the estate or heirs must repay the balance before inheriting the property. Typically the home is sold by the estate to satisfy the loan.
Is there a penalty for paying off a reverse mortgage early?
Most reverse mortgages do not impose a penalty for early repayment. However, check your loan terms for any prepayment clauses. Contact your lender to discuss payoff.
Next Steps & Key Takeaways
- A reverse mortgage must be repaid in full when the borrower dies, sells the home, or moves out permanently.
- To satisfy the loan, refinance into a traditional mortgage, sell the property, or pay the balance as a lump sum.
- Act immediately if you wish to cancel a recently originated reverse mortgage within the right of rescission period.
- Consider alternatives like downsizing or a home equity loan to supplement income without taking on a reverse mortgage.
Carefully weigh all your options if you are looking to get out of an existing reverse mortgage. Seek professional financial and legal advice for guidance on the repayment, refinancing, or cancellation process.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
