How to Get Out of a Reverse Mortgage

A reverse mortgage is a specialized loan product designed for homeowners, typically those aged 62 or older, allowing them to convert a portion of their home equity into accessible cash. Unlike traditional mortgages that require monthly payments from the borrower to the lender, a reverse mortgage involves the lender making payments to the homeowner. Repayment of the loan, including accrued interest, is deferred until a specific event occurs, such as the borrower’s death, the sale of the home, or when the home is no longer used as a primary residence.

Events Triggering Loan Due and Payable Status

Several events can cause a reverse mortgage loan to become due and payable. When these conditions are met, the full loan balance, including accumulated interest and fees, becomes immediately repayable to the lender.

One primary trigger is when the borrower no longer occupies the home as their principal residence. This includes situations where the borrower moves out permanently, such as to a long-term care facility. An absence exceeding 12 consecutive months, or over six months for non-medical reasons, typically constitutes a permanent move.

The death of the last surviving borrower also triggers the loan to become due and payable. The loan also becomes due if the property is sold or the title is transferred.

Failure to meet the ongoing terms of the loan agreement can also lead to the reverse mortgage becoming due. Borrowers are required to pay property taxes and homeowner’s insurance premiums on time. Maintaining the property in good condition is another obligation. Non-compliance can result in the loan being called due, potentially leading to foreclosure.

Voluntarily Paying Off the Loan

Borrowers have the option to voluntarily pay off a reverse mortgage at any time, even before a triggering event occurs. This direct repayment allows the homeowner to regain full equity in their property.

To determine the payoff amount, the borrower must request a payoff statement from their lender. This statement provides a precise figure that includes the principal balance, any accrued interest, and applicable fees, valid for a specific date. An updated statement is needed if the payoff is delayed, as the balance can change daily.

Funds for repayment can come from various sources, such as personal savings, refinancing the reverse mortgage into a traditional mortgage, or a new home equity loan or line of credit.

Once funds are secured and the exact payoff amount is known, the repayment process involves contacting the lender to arrange payment. After payment is processed, the lender releases the lien on the property. The homeowner should then receive formal documentation, such as a satisfaction of mortgage or deed of reconveyance, confirming the loan has been fully satisfied and the lien removed from the property’s title.

Selling the Property to Satisfy the Loan

Selling the property is a common method for satisfying a reverse mortgage loan. This ensures the loan is repaid from the home’s value, and any remaining equity is returned to the homeowner.

The homeowner should work with a real estate agent experienced with properties encumbered by reverse mortgages. The presence of the reverse mortgage must be disclosed to potential buyers.

The closing process involves the closing agent obtaining a final payoff statement from the lender. At settlement, sale proceeds are first used to pay off the reverse mortgage, clearing the lien and allowing ownership transfer.

Most reverse mortgages, particularly federally insured Home Equity Conversion Mortgages (HECMs), are non-recourse. This means if the home’s sale price is less than the outstanding loan balance, neither the borrower nor their estate is personally liable for the difference. The lender cannot pursue other assets to cover any shortfall, as the home itself serves as the sole collateral. Any funds remaining after the reverse mortgage and other closing costs are paid are disbursed to the homeowner.

Considerations for Heirs or Estate

When a reverse mortgage borrower passes away, the loan becomes due and payable, and their heirs or estate assume responsibility. Heirs should promptly notify the lender of the borrower’s death.

Lenders provide an initial six-month timeframe for heirs to decide on their course of action. This period can often be extended for an additional three months, up to a total of 12 months, if heirs demonstrate active efforts to sell the home or secure financing. During this time, heirs have three primary options to satisfy the reverse mortgage.

Heirs can repay the loan themselves to retain ownership. They are allowed to pay the lesser of the outstanding loan balance or 95% of the home’s appraised value. This protects heirs from owing more than the home is worth.

Alternatively, heirs can sell the home to satisfy the loan. Proceeds from the sale are used to pay off the reverse mortgage, and any remaining equity goes to the estate.

If heirs do not wish to keep or sell the property, they can deed the property back to the lender, which satisfies the debt. The non-recourse feature of reverse mortgages, as described above, also protects heirs.