Reverse mortgages give older homeowners some much-needed financial breathing room. Individuals aged 62 or older can tap into their home equity without needing to make monthly mortgage payments.
But just like any loan, reverse mortgages eventually have to be repaid with interest. And at some point, your financial goals may change, and you may want to get out of your reverse mortgage altogether. Knowing how to pay back a reverse mortgage can help you avoid financial stress down the road.
See if you qualify for a reverse mortgage. Start here.
How to repay a reverse mortgage
As long as you continue living in the home, maintaining the property, and paying your property taxes and homeowners insurance, you don’t have to pay back a reverse mortgage. But if the homeowner dies, moves out, or wants to sell the home, the reverse mortgage becomes due immediately.
At that point, you have a few different options as far as how you repay the loan. Most people pay off their reverse mortgage by selling their home. After the home sells, the proceeds are used to pay off the loan balance. Any leftover money goes to the borrower or their estate.
If the homeowner dies, their heirs are responsible for paying back the reverse mortgage. If the heirs want to keep the home, they can refinance the reverse mortgage into a traditional home.
If the heirs don’t want the home or responsibility for the loan, they can sign the title over to the lender, which releases them from any financial responsibility. They can also retire the loan by either paying the remaining balance or 95% of the fair market value, whichever is less.
When do you need to repay a reverse mortgage?
There are three primary scenarios that require a reverse mortgage to be repaid: the homeowner dies, chooses to sell the property, or no longer uses it as their primary residence. The first two scenarios are pretty self-explanatory, but there’s some nuance to the third.
For example, the homeowner may suddenly see their health dramatically decline, making it no longer feasible for them to live in the home. They may choose to move into an assisted living facility or move in with a family member. Since the home is no longer their primary residence, they must repay the reverse mortgage.
However, you aren’t required to wait for one of these events to occur before paying off your reverse mortgage. For some homeowners, their goals may eventually shift. Maybe they want to preserve part of their home equity for their heirs, or they may just want to stop the fees and interest from continuing to accrue.
See if you qualify for a reverse mortgage. Start here.
If you decide to pursue early repayment, you can either make a large lump sum payment or several partial payments. The way you structure it will depend on your financial situation and goals for the home.
Why should you get out of a reverse mortgage?
A reverse mortgage can be a useful tool, but it isn’t the right long-term solution for everyone. Over time, your goals or living situation may change, and you may want to pursue different options. Here are some common scenarios when it makes sense to get out of a reverse mortgage:
- You plan to move: Because the loan requires you to live in the home as your primary residence, relocating to a new city, moving in with family, or entering long-term care will automatically trigger repayment.
- Preserve home equity: Some borrowers may want to preserve their home equity for their heirs. Though reverse mortgages don’t come with a mortgage payment, interest and fees will continue to accrue, reducing the amount of equity available. By paying off the loan early or refinancing, you can leave more value in the home for your family.
- You no longer need the funds: Some borrowers may find that they simply no longer need the funds from the reverse mortgage. Maybe their retirement income has increased, or they’ve downsized other expenses. In these cases, paying off the reverse mortgage can eliminate ongoing interest charges and simplify their finances.
- Simplify finances for your heirs: Finally, a reverse mortgage can complicate property inheritance. If you die before paying off the reverse mortgage, your heirs will either need to refinance or pay off the loan balance. Both scenarios could prove to be difficult, depending on the home’s value and their financial circumstances. Taking care of the reverse mortgage ahead of time can protect your family members from this added financial stress.
See if you qualify for a reverse mortgage. Start here.
The bottom line
A reverse mortgage can be a good option for retirees looking for ways to access their home equity and keep their expenses low. But a reverse mortgage isn’t free money — the loan will eventually come due, whether you choose to sell, move out, or pass it on to your heirs.
Knowing your repayment options from the start can help you make an informed decision when it’s time to repay the loan. Before paying off your reverse mortgage, talk to your lender or financial advisor about the different options available to you. They can help you review your repayment strategies, assess whether refinancing or selling makes sense, and ensure that your next steps align with your long-term goals.
