Reverse mortgages can be confusing, especially when it’s time for repayment.
If you’re wondering how to pay back a reverse mortgage, the answer depends on your situation and what event triggered the repayment. Learn everything you need to know as a reverse mortgage holder or heir.
How a reverse mortgage repayment actually works
Reverse mortgage repayment doesn’t happen in monthly installments. When the balance comes due, the homeowner or their estate settles the loan, giving the full amount to the lender.
If you want to know how to pay back a reverse mortgage, here are your options.
Selling the home to cover the balance
The most common way to handle a reverse mortgage is to sell the home. Once the home is sold:
- The loan balance (including interest and fees) is paid off with the proceeds
- If there is any remaining equity, it goes to the homeowner or their heirs
Selling the home is the simplest solution. You don’t have to take out a new mortgage to buy the home back from the lender. Instead, you can wrap things up with one transaction.
But what if you want to keep the home? In that case, you’ll need to pay off the reverse mortgage.
Paying off the loan to keep the home
If you are the homeowner or heir and want to keep the property, you can pay back the reverse mortgage. Your options include:
- Refinancing into a traditional mortgage
- Paying in cash using savings
- Allocating proceeds from other assets
You may need to combine a few different sources of funds to keep the home. For example, you might use your personal savings to make a down payment and apply for a traditional mortgage to cover the difference.
There is a brief grace period of about six months after a repayment event happens. Use this time to get the home appraised and evaluate your options so you can decide whether you want to purchase it.
What happens if the loan balance is more than the home’s value?
One of the unique features of reverse mortgages is that they are nonrecourse loans. This means:
- You or your heirs won’t ever owe more than what the home is worth
- If the loan balance is greater than the sale price, insurance covers the difference
Even if the loan principal and interest grow beyond the home’s value, repayment is capped at what the property can sell for. This nonrecourse clause protects your heirs from owing a lender the difference on money you borrowed.
A reverse mortgage comes due all at once
When the borrower leaves the home, sells it, or passes away, the reverse mortgage will become due. After one of these triggering events, the lender is owed the full balance. There are no installment options with a reverse mortgage.
For example, if you decide to move away and sell your home, you’ll have to repay the reverse mortgage lender before any proceeds are distributed to you. Make sure that you carefully evaluate your options before taking out a reverse mortgage on your primary residence.
Common situations that trigger repayment
Let’s take a closer look at the scenarios that trigger reverse mortgage repayment.
Selling the home
If you decide to sell your home, you must pay the reverse mortgage off at closing. The proceeds from the sale go toward the loan balance first, as well as any other fees, such as title fees and real estate agent commissions. If there is any equity left, it is yours to keep.
A real estate agent can help you estimate how much to expect from selling your home, as long as they have an accurate reverse mortgage balance to run their calculations. Prior to closing, the title company will provide you with a more detailed breakdown.
Moving out permanently
When you have a reverse mortgage, you must use your home as a primary residence. Moving out of the home triggers repayment.
This clause protects lenders from risks associated with a home not being occupied by the primary owner. For example, if you rent out the home, your tenants may not keep up with maintenance, which could diminish the value of the property.
Death of the borrower
When the borrower passes away, the loan becomes due. If you are an heir, you can decide how to handle repayment. Your options include selling the home or paying off the balance to keep it.
You’ll have up to six months to repay the reverse mortgage. However, it typically takes several months to sell a home, while finalizing a mortgage can take 30 to 60 days. You should start the process as soon as you decide how to pay back a reverse mortgage.
Failing to meet loan requirements
When you have a reverse mortgage, you must meet any other obligations outlined in the lending agreement. Common terms include:
- Paying property taxes
- Maintaining homeowners insurance
- Keeping the home in good condition
Lenders can force repayment for failing to meet these requirements. If you are unable to pay the loan back, whether through savings or a traditional mortgage, you may have to sell the home.
Can you pay back a reverse mortgage early?
There are no rules preventing you from paying back a reverse mortgage whenever you’d like to. However, most people wait until one of the repayment criteria is met.
If you are an heir and intend to purchase the home when the homeowner passes away, you may decide to make payments to prevent interest from accruing. Discuss your options with the lender and any other family members who may have a right to the home.
What heirs need to know about reverse mortgages
If you inherit a home with a reverse mortgage, your first step should be contacting the lender. Find out what the balance is and how long you have to make a decision.
You can then sell the home, keep the home, or walk away. You should only walk away from the home if it is worth less than the loan balance. Since reverse mortgages are nonrecourse debt, you won’t owe the difference.
Build credit to improve mortgage eligibility
If you will have to take out a loan to pay off a reverse mortgage anytime soon, you may need to work on improving your eligibility by strengthening your credit profile. Platforms like Kikoff have tools that help you add positive payment history to boost your credit score.
Frequently Asked Questions
About the editor
