How to pay off a reverse mortgage may seem daunting, but it is as simple as paying the principal and interest. In fact, an important point to remember is that you can’t owe more than the house is worth.
- You have a 3-day right of rescission to cancel, after that, you must pay whatever balance accumulates.
- When a person dies the estate must pay the balance of the loan or 95% of the house’s appraised value, whichever is lower.
- You can make monthly payments on your loan.
- Selling a home with a reverse mortgage is like any other real estate transaction.
Whether you want to leave your house without debt to your loved ones, or you inherited a house with one of these loans, you shouldn’t be afraid of the prospect of paying it off. Let’s examine some of the issues with making payments on a reverse mortgage.
Cancel a Reverse Mortgage
You can cancel a reverse mortgage if you are within the 3-day right of rescission provided by Regulation Z of the Truth in Lending Act. If you are beyond the three days, then you need to repay the loan balance. You can do that a few ways:
- Pay the principal and interest from other savings
- Sell the home and pay off the loan from the proceeds
- Refinance the house into a conventional loan or a home equity loan
If you haven’t had the loan for a long time, then the first option may be possible. However, if you have been taking equity out of your home for a while, then you may need to get another type of loan or even sell your home to pay back the loan.
The good news is that they cannot charge you fees or penalties for changing your mind. As long as you pay back the balance, including the principal and interest, then you can get out of your reverse mortgage.1
When a Person Dies
What happens to a reverse mortgage when an owner dies depends on who inherits the property. If the spouse still lives in the house, then they can continue to live there and defer the repayment until after their passing.
For all other cases, the bank expects repayment when the borrower no longer uses the house as his/her primary residence. This means that if you inherit a property with a reverse mortgage you may have a large bill. The lender must notify the beneficiary of the loan balance, and the heirs have 30 days to decide about what to do. Usually, you have four options for dealing with the loan.
- If you have enough savings, you can pay the loan and keep the house
- Sell the house and use the proceeds to pay the balance
- Deed the property to the lender
- Walk away and let the lender foreclose
Do not let the bank foreclose, because it will damage your credit for a long time. If you want to keep the house, you can refinance to a conventional loan and keep the property. If you don’t want to deal with the house at all, simply deed the property back to the bank. It’s a better option than foreclosure for your credit.
If you sell the house, you can keep the proceeds if there is any equity left. If the loan is more than the house is worth you only pay 95% of the sale price. Therefore, even if the house is underwater, you can walk away without owing any money. Once you decide to sell, you can get a 6-month extension to market and sell the home. Beyond that, you can usually get another 6-month extension to close the transaction.2
Making Monthly Payments
You can make monthly payments on your reverse mortgage. Most people get this type of loan to provide a stream of income, but your situation may change. Some reasons people choose to make payments on their loan include:
- Pay the interest so that the balance does not increase.
- Leave your home to your heirs without debt.
People also get these as an alternative to refinancing. You would get a reverse mortgage and use that money to pay off your conventional loan. Then, you pay your reverse mortgage like you would a regular loan. You may want to do this if you have low credit scores or you want the flexibility of missing a payment occasionally.3
Selling a House With a Reverse Mortgage
You can sell your house with a reverse mortgage. In many respects, it works like any other home sale. You market the property and go through the inspection process, title search, and other standard contingency issues. The sale triggers a maturity event just like a conventional mortgage, but you should keep in close contact with your servicer in this case.
- Contact your loan servicer within 30 days of the closing.
- Your servicer sends you a due and payable letter and orders an appraisal.
- You will owe either the loan amount or 95% of the appraised value, whichever is lower.
- Ask for an extension if you need more time to market and sell the property. Lenders typically give you 6 months to sell the house, and you can ask for extensions beyond that if you need to.
- Close the sale and distribute the proceeds.
As you can see the process is the same as any other house sale, except you must keep closer contact with your lender. A good real estate agent and/or estate attorney will help you with that.4
Final Thoughts on How to Pay Off a Reverse Mortgage
How to pay off a reverse mortgage is not complicated. You owe a balance that includes principal and interest. When you repay that your debt is gone, and you get a clear title to your house. There are no prepayment penalties.
One thing to consider if you inherit a house with a reverse mortgage is you may not have to pay the entire balance. If the loan is more than the value of the house, you only need to pay 95% of the home’s value. You should speak with an estate lawyer about how best to settle the property with a reverse mortgage attached.