In retirement, a reverse mortgage can be a valuable financial instrument. However, this is a complex loan that is only suitable for some. Even individuals who have done their homework and understand how a reverse mortgage works may need to learn how to get out of the loan if necessary.
If you are considering a reverse mortgage or searching for a way out, continue reading to learn more about building an exit strategy. Rocket Mortgage® does not provide reverse mortgages, but we feel it is vital to provide you with educational resources so that you know all of your alternatives.
How Reverse Mortgages Operate
For a reverse mortgage to function, your home’s equity must first be used to pay down your present mortgage. The lender may provide the remainder of the funds as a flat amount, line of credit, or monthly installments. It is not a conventional mortgage; instead, it pays off your conventional mortgage, and you are only required to make payments once the loan matures. Like a conventional mortgage, you must continue paying property taxes, homeowners insurance, and home upkeep expenses.
In addition to the aforementioned financial commitments, there are other conditions for a reverse mortgage. You must be 62 years old and have sufficient home equity to qualify for a reverse mortgage. It must be your principal residence, regardless of whether you own it free and clear or still have a mortgage.
The Federal Housing Administration insures the home equity conversion mortgage (HECM), the most prevalent reverse mortgage (FHA). This can safeguard the borrower. If you desire a HECM, you will be asked to undergo a financial evaluation to confirm that you are willing and able to meet the loan’s responsibilities. You will also be required to attend a counseling session to verify that you comprehend the loan terms and know that it must be repaid.
When Must the Reverse Mortgage Be Paid Off?
You may not be obliged to make monthly payments on your reverse mortgage, but you may ultimately be compelled to repay the debt. Reverse mortgages need repayment:
- When the borrower passes away
- When the borrower no longer stays in the house or the home is no longer their primary residence, the borrower’s obligation to repay the mortgage becomes due.
- When the borrower sells or transfers the title to the dwelling.
- If borrowers fail to fulfill their loan requirements, including paying property taxes and homeowner’s insurance, they will default.
How Does One Repay a Reverse Mortgage?
Reverse mortgages are often repaid using the profits from the home sale. If the debt becomes due to your death, your heirs will be liable for the repayment and will have many alternatives for doing so:
- Sell the property and apply the money to the loan balance.
- Refinance into a conventional mortgage or utilize their funds to acquire the house for the loan balance or 95% of the home’s assessed value, whichever is lower.
- Sign the title over to the lender and leave the debt behind.
Is It Possible to Get Out of a Reverse Mortgage?
There are several methods to exit a reverse mortgage if you choose to do so. When selecting the ideal choice, you should evaluate your objectives and financial position. Some solutions may incur expenses, while others may necessitate a change in lifestyle, such as moving out of the house. The Department of Housing and Urban Development-approved financial advisor or reverse mortgage counselor may be your greatest resource when weighing your alternatives (HUD).
Motives for Canceling a Reverse Mortgage
There may be personal or financial motives for a reverse mortgage holder to terminate the agreement. Common explanations include the following:
- You may require a nursing home or assisted living facility.
- You suffer from buyer’s regret.
- You discover that the profits from your reverse mortgage need to be increased to cover your homeowner’s insurance, property taxes, and home maintenance bills.
- You have decided to give the home to your heirs without requiring them to purchase it.
- You live with someone not on the mortgage, and they might be evicted if you die or leave the property.
- You no longer require the support of a reverse mortgage to supplement your income or pay for house repairs.
Regardless of your motivation, you have alternatives. Taking the time to examine why you want to get out of this sort of loan can assist you in selecting the best method.
Five Ways to Escape a Reverse Mortgage
Before committing to a reverse mortgage, ensure that you understand how the loan works, the advantages and downsides of obtaining a reverse mortgage, and your financial obligations, such as paying closing costs, insurance, and property taxes, as well as repaying the loan. Additionally, you will need to be aware of your choices. All of them are covered by reverse mortgage counseling, which is necessary for the HECM.
If, after careful study, you decide to obtain a reverse mortgage and then decide you no longer want the loan, there are five basic ways to get out of it.
Exercise Your Right of Retraction
Reverse mortgages have three days immediately following loan closing, during which the transaction can be canceled without penalty. This is referred to as the right of rescission, and it permits you to change your mind if you have buyer’s remorse immediately after signing the closing paperwork. The lender will repay any fees, closing charges, and unused monies paid by the borrower within twenty days.
If you choose to exercise your right of cancellation, you must notify your lender in writing. Remember that this window of opportunity lasts only three days after you close. After then, the loan cannot be canceled without penalty.
Sell the Property
One of the simplest methods to escape a reverse mortgage is to sell the property and use the money to pay down the debt. Depending on what you owe, you will retain any residual revenues from the sale after paying off the debt. Therefore, if you owe $150,000 on the loan and the property is sold for $200,000, you will pay off the debt first and pocket the remaining $50,000.
What happens if the mortgage exceeds the home’s value? HECMs are non-recourse loans, which means you will never owe more than the value of your property. FHA insurance will reimburse the difference if you sell your property for less than what is outstanding on the loan.
Repay the Loan Using Your Own Money
When it comes time to repay the loan, you must pay back the principal amount plus any accumulated interest. If you desire to remain in your house and not sell it, you must repay the loan from your funds. This may entail using your money to pay it off in one single amount or establishing a payment plan in which you make several installments. This may require establishing a new budget and the commencement of monthly loan payments.
Refinance the Reverse Mortgage
Perhaps it’s not the reverse mortgage you wish to get out of, but rather the conditions of your reverse mortgage. If so, consider refinancing your current reverse mortgage into one with more favorable terms. If interest rates are lower than when you initially received your loan or the value of your house has grown, you may refinance into a new reverse mortgage. This might result in a better interest rate, the conversion of an adjustable rate to a fixed rate, faster loan repayment, or access to additional equity.
Keep in mind that there will be closing expenses associated with refinancing.
Get a New Loan
Another option for refinancing a reverse mortgage is to convert it into a regular loan. The loan will repay the reverse mortgage, and you will resume making monthly mortgage payments. This can help you preserve and develop your home’s value and protect your heirs from reverse mortgage-related issues should you die away. Remember that closing charges are connected with this refinance and that you must make monthly payments on the loan. Before selecting this option, you should ensure that you can afford it.
Even after educating yourself about reverse mortgages, weighing the benefits and disadvantages, and making an informed decision to get the loan to attain your goals, you may desire to exit your reverse mortgage. If so, you have several alternatives, including selling your house, using your assets to repay the loan, or refinancing to pay off the debt or obtain better terms. If you change your mind within a few days of finalizing the loan, you can cancel it without incurring any fees. Your best alternative will depend on how long you’ve had the loan, what you want to do with the property, and how much you can pay. If you are considering obtaining a reverse mortgage, you should read more about the other forms of mortgage loans accessible to you.