If you want to get out of a reverse mortgage, there is usually a way. You can sell the home, cancel the loan within the first 20 days, pay off the loan, or get a refinance. Here’s a detailed guide on how to do it.
Reverse mortgages are a popular way to get access to home equity during a person’s end of life. However, there are scenarios when you may realize that a reverse mortgage wasn’t the best option for you. Thankfully, reverse mortgage loans can be, well, reversed. Or at least, you can get out of them. Here’s how to get out of a reverse mortgage loan.
How a reverse mortgage works
A reverse mortgage, also known as equity conversion mortgages (HECMs), pays the owner of the home funds. This is a loan that allows homeowners to draw money from their home’s equity. The mortgage loan becomes due and payable when the last surviving borrower dies or moves away.
These loans are usually meant to be a final loan to help bridge any monetary needs while a retired couple enjoys their last years. This is great, but when the loan becomes due, it has to be paid within 30 days. Moreover, you still have to pay property taxes and do home repairs. It’s part of the contract.
They also can spell the end of the ownership of a home for the family, since most people sell their homes or cede control over the house in order to pay for the loan. As a result, many people try to get out of a reverse mortgage when they can.
Thankfully, you can get out of a reverse mortgage if you change your mind. It just depends on how you want it to happen. Here’s how.
5 ways to get out of a reverse mortgage
Now that we have gotten a better idea of what a reverse mortgage loan entails, it’s time to look at how to get out of a reverse mortgage.
1. Just change your mind (Right of rescission)
Did you recently get approved for your home equity conversion mortgage? Did you realize that your current interest rate wasn’t smart, or that your loan agreement could mean your family will be homeless? It happens to a lot of people, even when they know how reverse mortgages work.
Thankfully, there’s a little secret here. You have a Right of Rescission that extends for a minimum of 20 days after the loan closing day. If you realize it’s not right for you, you can exercise this right, and it’ll be like the loan never existed.
2. Sell the house
If you have passed the point of no return, then you might want to talk with a financial advisor about whether it makes sense to sell the house. In many cases, this will ensure that your debt is paid off, even if interest rates made the total amount owed more than the home is currently worth.
Any funds that you have left over will be able to go to the heirs, so this isn’t a full loss. This is why most nonborrowing spouse cohabitants choose to sell or hand over the keys.
3. Pay it back with your own funds
In most cases, your mortgage lenders will not give you a payment plan that you have to follow. Rather, they’re going to expect the payment to be done, in full, within 30 days. However, you can still pay off the loan if you have a lot of funds in your account.
The good news is that you don’t have to pay off the entire loan. You just have to pay off the amount borrowed plus interest. If there are any unused funds paid, it’s a matter of simply returning the cash, plus a little interest. If it’s a line of credit, you might not even need to pay much.
If you want to do this, it’s best to find out if your reverse mortgage is a home equity line of credit, or if you just have a low loan balance. If you do, you can usually pay it off immediately, out of pocket, with no servicing fees to speak of.
There are two ways to make a refinance happen: using a traditional mortgage or by shopping around for a reverse mortgage with better interest rates. Here is our list of the best mortgage refinance lenders.
If you choose a conventional mortgage as your vehicle, the mortgage will only cover the existing loan balance. You don’t have to repay the entire home price in most cases. Once the new mortgage is done, you keep the home.
If you get a new reverse mortgage, then you might have to pay more origination fees, deal with FHA insurance, and also ensure you have enough money to deal with any home repairs. Either way, having lower interest can make it worth it.
5. New Loan
Let’s face it, most people who get a reverse mortgage don’t ever want to have to get another mortgage again. Most people don’t want to sell, either. Heirs don’t want to deal with another origination fee eating into their equity, nor do they want to have to pay closing costs on a smaller home after a sale.
If you owe just a little bit of money from living expenses covered by the mortgage, then you might be able to pay off the reverse mortgage by taking out a personal loan or through home equity financing.
When does the reverse mortgage need to be paid?
The reverse mortgage becomes due when the last borrower dies or moves away. Heirs or surviving nonborrowing spouses have a total of 30 days to pay off the loan in a lump sum. Unlike a traditional mortgage, you don’t have monthly payments available as a payment option. It’s a “lump sum only” type of deal.
Reverse mortgages are FHA-insured loans that are backed by the federal government and will not ask you to pay more than the value of the house. In other words, your heirs won’t have to pay more than the house is worth.
Can you get out of a reverse mortgage?
It depends. A reverse mortgage/HECM has a small window of time where you can back out of it. Most home equity conversion mortgages (HECM’s) will give you around 20 days to determine if this loan is right for you. If you find it’s not, then you can legally back out of a reverse mortgage. If the 20 days have already come and gone, you can use the strategies mentioned above.
Reasons for exiting a reverse mortgage
Having a reverse mortgage is not always an easy deal. There are many reasons to exist a reverse mortgage. These include…
- You came into a lot of money. Many people find that they no longer need the line of credit or lump sum cash because they got money elsewhere. In this case, there is no need to keep your reverse mortgage.
- You need to move into a nursing home, hospice care, or want to move elsewhere. This usually tends to mean that your reverse mortgage will need to come due soon. You have to figure out your next step and where you want to use your reverse mortgage proceeds.
- You want to keep the home in the family, or worry that your spouse might become homeless. If you want to prevent the reverse mortgage from taking your home, you may want to exit it.
- Or, you may just have changed your mind. Reverse mortgage borrowers often worry that they made the wrong decision. As a result, they may want to walk back on their reverse mortgage.
Things to consider before you get a reverse mortgage
Reverse mortgage loans have their own risks that you should consider before you pursue them. These include the following issues below:
- Your federal insurance fund might be more than you expected it to be. Yes, you have to pay insurance on your reverse mortgage. It can eat into your cash flow.
- Reverse mortgages may not be able to cover all the expenses you need. Living expenses aside, you still have to do property taxes and home repairs. Most reverse mortgages can cover this to a point, but not all of it.
- In some cases, you may end up at risk of foreclosure. If you cannot afford to keep up the house, it may end up getting foreclosed upon. This can leave you (or your heirs) penniless and homeless.
- If you owe money on the house, part of the mortgage proceeds will go towards paying the remaining balance on your original loan. This means that you may not get as much money as you thought you would. In extreme cases, you might end up with no money and problems affording your house.
Frequently asked questions
How do you buy a house back after a reverse mortgage?
The easiest way to do this is to refinance the home equity loan by getting a traditional mortgage on the home. This will negate the lump sum you got and require you to make monthly mortgage payments once more.
Can a family member buy out a reverse mortgage?
Yes. If a family member wants to buy your home after a reverse mortgage, all they have to do is take out a forward mortgage on the home. You can usually talk to the lender who gave you the reverse mortgage to find out the exact terms.
Can you sell a house that has a reverse mortgage?
Absolutely. In fact, most people who want to get out of a reverse mortgage or pay it off choose to sell it.
What happens when you move out of a home with a reverse mortgage?
If you move out of a home that has a reverse mortgage on it, then your mortgage may become due. This means that you will have to pay off the loan in a large lump sum. You can read more about it here.
What happens when you walk away from a reverse mortgage?
If you fail to pay your reverse mortgage, the lender will foreclose on the property. If you inherit a house with a reverse mortgage, you can choose to pay back the loan, sell it to repay the mortgage, deed the property to the lender, or do nothing and let it foreclose.
- Yes, you can get out of a reverse mortgage.
- Reverse mortgages are a great concept, but that doesn’t mean all reverse mortgage borrowers will be happy with these loans.
- Most people do so by selling the home or paying off the loan.
- You have the right of rescission that allows you to cancel the reverse mortgage for 20 days.
- If you want to keep the home, you can refinance the reverse mortgage.
- Failure to pay off the loan will cause your home to go into foreclosure.
Not sure which reverse mortgage loan company is right for you? Take a look at our reviews, and read up on what a reverse mortgage could mean for your bottom line.
View Article Sources
- Home Equity Conversion Loans – Federal Trade Commission
- Home Equity Conversion Mortgages – U.S. Department of Housing and Urban Development
- Reverse Mortgage Loans – CFPB