When and How to Pay Off a Reverse Mortgage

A reverse mortgage is a financial product allowing homeowners, typically those aged 62 and older, to convert a portion of their home equity into tax-free cash. Unlike a traditional mortgage, it does not require monthly mortgage payments, as the loan balance grows over time with accrued interest and fees. The loan becomes due and payable only under specific conditions, when the homeowner or their estate must address the balance. This tool provides liquidity from home equity without forcing a sale, but understanding repayment triggers is essential for borrowers and their families.

Events Triggering Repayment

A reverse mortgage loan becomes due when certain events occur, marking the time when the loan balance must be settled. The most common trigger is the death of the last surviving borrower named on the loan. In this scenario, the heirs or estate are responsible for addressing the loan.

Another trigger occurs if the borrower sells the home. Sale proceeds are then used to satisfy the outstanding balance. Similarly, the loan becomes due if the home ceases to be the principal residence of at least one borrower for a continuous period, typically exceeding 12 months. This can happen if a borrower permanently moves to a nursing home, assisted living facility, or another residence.

The loan can also become due if a borrower fails to meet the loan agreement terms. These commonly include obligations to pay property taxes and homeowners insurance premiums. Maintaining the property in good condition is another typical requirement. Failure to fulfill these responsibilities can lead to the loan becoming due.

Options for Repaying the Loan

Once a reverse mortgage becomes due, several options are available to satisfy the balance. One common method is to sell the home, using the proceeds to pay off the loan. Due to their non-recourse nature, borrowers or heirs will not owe more than the home’s value or the outstanding balance, whichever is less. If the sale proceeds exceed the loan balance, the remaining funds belong to the borrower or their estate.

Alternatively, borrowers or their heirs can choose to pay off the loan using personal savings, investments, or other assets. Another strategy is to refinance the property with a new conventional mortgage, allowing the borrower or heirs to retain ownership.

Heirs have specific provisions for satisfying the reverse mortgage debt to retain the property. They can choose to pay off the loan at 95% of the home’s current appraised value, provided this amount is less than the total outstanding loan balance. This allows heirs to purchase the home from the estate for a reduced amount. If heirs do not wish to keep the home, they can allow the property to be sold, with the proceeds used to satisfy the debt, and any surplus going to the estate.

The Repayment Process

Repayment begins by contacting the loan servicer after a triggering event. This informs the lender of your intent and helps you understand the next steps. The lender will then provide guidance on necessary documentation and timelines for repayment.

A primary step involves requesting a payoff statement from the loan servicer. This document provides the exact amount required to satisfy the loan, including the principal balance, accrued interest, and any fees, along with a per diem interest rate for calculating the final amount based on the payoff date. Lenders typically provide this statement within a few business days of the request, outlining precise instructions for remitting payment.

The repayment method depends on the chosen option. If the home is being sold, a closing agent or title company manages the transaction, ensuring the reverse mortgage is paid off directly from sale proceeds. When paying with cash or other funds, the payment is typically made via wire transfer or certified check, sent directly to the loan servicer as instructed on the payoff statement. For those refinancing, the new mortgage lender handles the payoff as part of the new loan’s closing process.

After repayment, the lender provides a satisfaction of mortgage or lien release. This document confirms the debt is paid and removes the lien from the property’s title. Ensure this release is properly recorded with the local county recorder’s office to clear the property’s title. Heirs typically have six months to repay after a borrower’s death, with potential extensions available upon communication and agreement with the lender.