899 how do you pay back a reverse mortgage bankrate

How Do You Pay Back a Reverse Mortgage? – Bankrate

Kevin O’Leary June 19, 2024 0

Reverse mortgages have become an increasingly popular financial tool for older homeowners looking to supplement their retirement income. However, many borrowers and their families may not fully understand the repayment obligations associated with these loans. In this article, we’ll explore the various aspects of reverse mortgage repayment, including when the loan becomes due, options for paying it back, and considerations for heirs inheriting a home with a reverse mortgage.

Understanding Reverse Mortgage Repayment

A reverse mortgage is a unique type of loan that allows homeowners aged 62 and over to borrow against the equity in their home without having to make monthly mortgage payments. Instead, the lender provides funds to the borrower in the form of a lump sum, monthly payments, or a line of credit. The loan balance, including interest and fees, accumulates over time and must be repaid when certain triggering events occur.

It’s crucial for borrowers and their families to understand that a reverse mortgage is not free money; it is a loan that must be paid back eventually. Failing to grasp the repayment obligations can lead to financial difficulties and even the loss of the home.

When Is a Reverse Mortgage Due?

A reverse mortgage typically becomes due and payable when one of the following events occurs:

  • The borrower passes away
  • The borrower moves out of the home for more than 12 months
  • The borrower fails to pay property taxes or homeowners insurance
  • The home falls into disrepair and does not meet FHA standards

Once a triggering event happens, the lender will issue a due and payable notice, giving the borrower or their heirs a set period (usually 30 days) to settle the loan balance. In some cases, an extension of up to 6 months may be granted to allow time for repayment arrangements.

Options for Paying Back a Reverse Mortgage

There are several ways to pay back a reverse mortgage, depending on the borrower’s or heir’s financial situation and goals:

  1. Sell the home: The most common method is to sell the property and use the proceeds to pay off the loan balance. Any remaining equity belongs to the borrower or their estate.
  2. Refinance the mortgage: If the borrower or heirs wish to keep the home, they can refinance the reverse mortgage into a traditional forward mortgage, assuming they qualify for the new loan.
  3. Use other funds: The loan balance can be settled using savings, investments, or proceeds from a life insurance policy.
  4. Deed in lieu of foreclosure: As a last resort, the borrower or heirs can voluntarily transfer ownership of the home to the lender to satisfy the debt and avoid foreclosure.

Reverse Mortgage Repayment for Heirs

When a borrower with a reverse mortgage passes away, the loan balance becomes the responsibility of their estate or heirs. It’s important for family members to understand their rights and obligations in this situation to make informed decisions about the home and the outstanding debt.

Heir’s Responsibilities for Reverse Mortgage Debt

Heirs are not personally liable for the reverse mortgage balance, meaning they are not required to use their own assets to repay the loan. However, if they wish to keep the home, they must settle the debt through one of the methods mentioned earlier (refinancing, paying off the balance, or selling the property).

If the home is worth less than the loan balance, heirs can choose to walk away from the property without any financial obligation. In this case, the lender would sell the home and absorb any shortfall, as reverse mortgages are non-recourse loans insured by the Federal Housing Administration (FHA).

Repayment Timeline and Process for Heirs

Upon the borrower’s death, heirs typically have 30 days to decide how they want to proceed with the reverse mortgage. They can request an extension of up to 6 months to arrange financing, list the property for sale, or explore other options. It’s crucial to communicate with the lender and keep them informed of any actions being taken to settle the debt.

If the heirs fail to repay the loan or respond to the due and payable notice, the lender has the right to foreclose on the property to recoup the outstanding balance. To avoid this outcome, heirs should work closely with the lender and seek guidance from financial advisors or real estate attorneys specializing in reverse mortgages.

Considerations for Exiting a Reverse Mortgage Early

While most reverse mortgages are repaid after the borrower passes away or moves out of the home, there may be situations where exiting the loan early makes sense. Understanding the implications and options for early repayment can help borrowers make informed decisions about their financial future.

Reasons to Pay Off a Reverse Mortgage Early

Some common reasons borrowers may choose to pay off a reverse mortgage early include:

  • Improved financial circumstances that no longer require the additional income
  • Desire to leave the home to heirs unencumbered by debt
  • Concern about rising interest rates and growing loan balance
  • Plans to sell the home and downsize or relocate

Before making the decision to exit a reverse mortgage early, borrowers should carefully consider their long-term financial needs and consult with a financial advisor to explore alternative options.

Methods for Early Reverse Mortgage Repayment

If a borrower decides to pay off their reverse mortgage early, they have several options:

  1. Lump-sum payoff: The borrower can use savings, investments, or proceeds from the sale of other assets to pay off the entire loan balance in one payment.
  2. Refinance to a traditional mortgage: By refinancing the reverse mortgage into a forward mortgage, the borrower can begin making monthly payments to pay down the debt over time.
  3. Sell the home: If the borrower no longer wishes to live in the home, selling the property and using the proceeds to settle the loan balance is a viable option.
  4. Gradual repayment: Some reverse mortgage programs allow borrowers to make voluntary payments to reduce the loan balance over time, minimizing interest accrual and preserving more equity.

Seeking Advice on Reverse Mortgage Repayment

Navigating the complexities of reverse mortgage repayment can be challenging for borrowers and their families. Seeking guidance from qualified professionals can help ensure that all parties understand their rights, obligations, and options for settling the loan balance.

Consulting a Financial Advisor

A financial advisor experienced in reverse mortgages can help borrowers and their heirs assess their financial situation, explore repayment strategies, and make informed decisions. They can also provide guidance on tax implications, estate planning, and alternative funding sources for paying off the loan.

When choosing a financial advisor, look for professionals with specific experience in reverse mortgages and a commitment to acting in their clients’ best interests. Consider seeking recommendations from trusted sources and verifying the advisor’s credentials and regulatory compliance.

Working with a Real Estate Attorney

For heirs inheriting a home with a reverse mortgage, consulting a real estate attorney can provide valuable legal guidance and support. An attorney can help heirs understand their rights and obligations under the loan agreement, negotiate with the lender, and navigate the repayment process.

Real estate attorneys can also assist with probate matters, title issues, and disputes among family members regarding the disposition of the property. When selecting an attorney, look for one with experience in reverse mortgages and a track record of successfully representing clients in similar situations.

In conclusion, understanding the repayment obligations and options associated with reverse mortgages is crucial for borrowers and their families. By exploring the various methods for paying back the loan, considering early repayment when appropriate, and seeking guidance from qualified professionals, homeowners can make informed decisions that protect their financial well-being and legacy.

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