Can You Undo a Reverse Mortgage?

A reverse mortgage allows homeowners, typically those aged 62 and older, to convert a portion of their home equity into cash. This financial tool is distinct from a traditional mortgage because it does not require monthly mortgage payments from the borrower. Instead, the loan balance grows over time as interest accrues and funds are advanced. Understanding how a reverse mortgage can be repaid is important for borrowers and their families. This can occur through initial cancellation, voluntary repayment, or when specific events cause the loan to become due and payable.

Initial Cancellation Right

Borrowers have a specific, short-term right to cancel a reverse mortgage immediately after closing. This is known as the “Right of Rescission,” mandated by the Truth in Lending Act (TILA). This right allows for cancellation without penalty for any reason within three business days after signing the loan documents, receiving all disclosures, and receiving two copies of the notice of the right to cancel, whichever event occurs last.

To exercise this right, the borrower must notify the lender in writing within this three-business-day window. It is advisable to send this notification by certified mail with a return receipt to document when the lender received it, and to keep copies of all correspondence. Upon proper rescission, the loan agreement becomes void, and the lender is required to return any money or property received from the borrower, typically within 20 days. This right provides a brief period for reconsideration.

Voluntary Repayment Options

A reverse mortgage can be repaid voluntarily by the borrower at any point before a triggering event makes the loan due. A significant feature of reverse mortgages, especially Home Equity Conversion Mortgages (HECMs), is their non-recourse nature, meaning the borrower or their estate will generally not owe more than the home’s value or the loan balance, whichever is less, when the loan becomes due.

Borrowers can choose to repay the entire outstanding balance, including the principal borrowed, accrued interest, and any financed fees, in a single lump sum. Alternatively, borrowers can make partial payments to reduce the loan balance. Making partial payments can help slow the growth of the loan balance due to accruing interest, thereby preserving more home equity.

To make a voluntary payment or a full payoff, the borrower should contact their loan servicer to request a payoff statement. This statement details the exact amount needed to satisfy the loan as of a specific date, including the principal balance, accrued interest, and any applicable fees. The request for a payoff statement should typically include the FHA case number, property address, borrower’s name, anticipated payoff date, and contact information for where the statement should be sent. Payment can then be made through methods such as wire transfer or certified check, as specified by the servicer.

Loan Becoming Due and Payable

A reverse mortgage is not repaid on a fixed schedule like a traditional mortgage; instead, it becomes due and payable upon the occurrence of specific “triggering events.” These events typically signal that the borrower no longer occupies the home as their primary residence or has passed away.

The most common triggering event is the death of the last surviving borrower on the loan. When this occurs, the heirs or the estate typically have a period, often six months, to decide how to repay the loan, with potential for extensions. Options for heirs include repaying the loan balance, selling the home to satisfy the debt, or, if they do not wish to keep the property, signing a deed in lieu of foreclosure to transfer ownership to the lender.

Other events that cause the loan to become due and payable include selling the home, as the proceeds from the sale must first be used to repay the reverse mortgage balance. If the borrower permanently moves out of the home, such as into assisted living, and no longer resides there for a period exceeding 12 consecutive months, the loan also becomes due. Additionally, failure to meet ongoing loan terms, such as paying property taxes, maintaining homeowner’s insurance, or keeping the property in good repair, can also trigger the loan to become due and may lead to foreclosure.

Financial Considerations of Repayment

Repaying a reverse mortgage involves understanding the specific financial components that constitute the total amount owed. The loan balance includes the principal limit used, which is the total amount of money advanced to the borrower. Interest accrues on this outstanding balance, compounding over time and increasing the total debt.

Other costs added to the loan balance can include loan origination fees, servicing fees, and annual Mortgage Insurance Premiums (MIP). For federally insured HECMs, an upfront MIP is paid at closing, and an annual MIP is assessed on the outstanding loan balance. These premiums protect the lender in case the loan balance exceeds the home’s value at repayment.

Regarding tax implications, the proceeds received from a reverse mortgage are generally not considered taxable income by the IRS, as they are treated as loan advances rather than earnings. This also means they typically do not affect Social Security or Medicare benefits. However, interest accrued on a reverse mortgage is generally not tax-deductible until the loan is actually repaid. Even then, deductibility may be limited to interest on funds used for specific purposes, such as home acquisition or substantial improvements. If the home is sold to repay the loan and its value has appreciated significantly, capital gains tax might apply to the profit from the sale, although not to the loan proceeds themselves.