When Do You Pay Back A Reverse Mortgage
A reverse mortgage does not require you to make any monthly repayments until the loan comes due. This generally happens when you do any of the following:
- Pass away
- No longer use the home as your primary residence
- Transfer the title of the home into someone else’s name
- Default on any of the terms or conditions of your reverse mortgage
Consult your contract to see what might make your loan come due.
These maturity events may come about in unconventional ways, so be sure to think your actions through ahead of time. For example, if you plan to travel for more than a year, your lender may execute the early payback clause. Likewise, your permanent residence may change if you ever move to an assisted living facility or nursing home. Your reverse mortgage could even come due if you fail to keep your home in good condition or pay your homeowners insurance or property taxes on time.
However, if you pass away and your spouse is not a co-borrower of the loan, they may be able to continue living at the property without having to repay the loan until it otherwise reaches maturity. If you have a HECM from on or after Aug. 4, 2014, the U.S Department of Housing and Urban Development’s non-borrowing spouse rule helps protect your spouse as long as they meet certain criteria. Earlier HECMs or proprietary reverse mortgages may not have these protections for spouses, though.
How To Get Out Of A Reverse Mortgage: 5 Options
If youre seeking an alternative to reverse mortgages or your situation changes and your home will no longer be your primary residence, you have a few options. The right choice for you depends on how long ago you took out the loan and your overall financial situation.
Heres how to get out of a reverse mortgage.
You Can Repay Your Reverse Mortgage Debt In Various Ways
The standard way to repay a reverse mortgage is by selling your property. You receive the proceeds of the sale, minus the money you’ve borrowed against your equity. Of course, you will also be charged interest on this money. There may also be lender fees to pay.
It’s important to use a reverse mortgage calculator to get a clearer estimate of how much a reverse mortgage will cost you.
But there are other repayment options. Some lenders, such as Heartland Seniors Finance, offer unlimited additional repayments for reverse mortgage borrowers. This effectively allows you to repay what you’ve borrowed early, rather than waiting until you sell. This added flexibility can be helpful in reducing your overall interest costs.
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What You Need To Know About Repaying A Reverse Mortgage
Repayment of a home equity loan balance may be deferred until the last borrower or non-borrowing spouse has died, moved, or sold the home. Prior to that time, repayments can be made voluntarily at any point to help reduce future interest due and to allow for a larger line of credit to grow for subsequent use. There is no penalty for early repayment.
When the final repayment is due, the title for the home remains with the family or heir. Should heirs wish to keep the home, the loan balance can be repaid with other funds. Heirs could also refinance the home with a traditional mortgage should they wish to keep it. Should heirs decide to sell the home, they keep any amount the home sells for in excess of the outstanding loan balance. Should the loan balance exceed what the home can reasonably be sold for, heirs can simply hand over the keys to the home to the lender through a deed in lieu of foreclosure and not have to worry about working through the process of selling it themselves.
A deed in lieu of foreclosure is sufficient to extinguish the debt on the reverse mortgage, and the mortgage insurance from the government will compensate the lender for the difference. Generally, up to 360 days will be provided to sell the home or refinance when the loan comes due, but this requires a few extensions from the lender and it is important to maintain regular contact and provide updates to the lender to use the full 360 days.
HELOC vs. HECM
What If My Home Sells For Less/more Than What I Owe On The Reverse Mortgage
If your home depreciates in value and the Mortgage amount due is more than the sale price, HomeEquity Bank will cover the difference between the sale price and the Mortgage amount as long as you have met your obligations under the mortgage, including paying your property taxes, maintaining your property and paying your home insurance. This is HomeEquity Bankâs Negative Equity Guarantee. Our conservative lending practices ensure that you will never owe more than the fair market value of your home. In most cases, your home will appreciate in value. In fact, 99% of clients have money left over when their Mortgage is repaid.
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Use Your Right Of Rescission
Reverse mortgages have a 3-day period directly after you close on your loan in which you can cancel the transaction with no penalty. This is known as the right of rescission and it allows you to change your mind should you have buyers remorse right after you sign the closing documents. Within 20 days, the lender will return all fees, closing costs and unused funds paid by the borrower.
If you decide to practice your right of recission, you will need to inform your lender in writing. Remember, this window of time lasts up to only 3 days after you close. After that, you cannot cancel your loan without penalty.
The Future Of Reverse Mortgages
The conventional wisdom on how to treat housing wealth in retirement has been to preserve it as a last-resort option, with reverse-mortgage lenders thus viewed as lenders of last resort. If housing wealth is not needed to help fund retirement, this view goes, the home can be left as part of the legacy for the next generation. As a result, its easy to find reverse-mortgage naysayers: former Minister of National Revenue Garth Turner famously quipped that reverse mortgages are an ideal strategy, if you hate your children.
The criticisms of reverse mortgages tend to focus on the rates, which are more than double comparable five-year mortgage rates and several percentage points higher than HELOC rates .
Another focus of criticism is the overall indebtedness of seniors who may have few, if any, other options. This lack of options, however, is what puts reverse mortgages on the table in the first place: With lowered incomes in retirement, mortgages and HELOCs may be unavailable to many Canadians.
Simply selling the home to create the desired cash flow can present other problems, as the principal residence provides a source of tax-free compounding that is decreased by downsizing or eliminated by renting. As a result, a senior who wants to age in place, perhaps with the support of a reverse mortgage to cover home renovation or care costs, may find the reverse mortgage the best of their available options.
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Would You Benefit From A Reverse Mortgage
A reverse mortgage might sound a lot like a home equity loan or a home equity line of credit . Indeed, similar to one of these loans, a reverse mortgage can provide a lump sum or a line of credit that you can access as needed, based on how much of your home youve paid off and your homes market value. But unlike a home equity loan or a HELOC, you dont need to have an income or good credit to qualify, and you wont make any loan payments while you occupy the home as your primary residence.
A reverse mortgage is the only way to access home equity without selling the home for seniors who either dont want the responsibility of making a monthly loan payment or cant qualify for a home equity loan or refinance because of limited cash flow or poor credit.
How Long Do Heirs Have To Pay Off A Reverse Mortgage
If the last surviving borrower or eligible non-borrowing spouse on a reverse mortgage loan dies, it falls to the estate and heirs to repay the debt.
According to federal regulations, heirs are required to repay the full loan balance or 95 percent of the appraised value of the home, whichever is less. The lender will typically provide the heirs with options for repayment, after which theyll have 30 days to make a decision. Depending on where you live, you may have longer to actually pay off the loan.
The exact time frame is usually decided by the state, Auerswald says. Most reverse mortgages are due within one to six months after the owner has died.
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How Do Reverse Mortgages Work
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you dont have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages offered by some state and local government agencies, as well as non-profits proprietary reverse mortgages private loans and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages .
Ways To Get Out Of A Reverse Mortgage
Before getting into a reverse mortgage, make sure you understand how the loan works, the pros and cons of getting a reverse mortgage and what your financial responsibilities will be including paying for closing costs, paying insurance and property taxes and paying back the loan. Youll also want to make sure that you know what alternatives you have. Reverse mortgage counseling will cover all of these things, which is why its required for the HECM.
If, after all of this careful consideration, you get a reverse mortgage and find that you no longer want the loan, here are five common ways to get out.
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How Can Reverse Mortgage Funds Be Used
The money you receive from a reverse mortgage can be used in any way you like. There are several methods for receiving funds and how you use this money depends on your retirement goals and personal financial situation. If there is an existing mortgage on your home, the money from the HECM is first used to pay off the balance. The remaining funds can be taken in any of the following distribution methods:
- A one-time payment, income tax-free.4
- Steady, tax-free monthly payments.4
- A line of credit, as a safety net for later use if needed.
- A combination of these methods.
Each homeowner is different, and our customers have found creative ways to use a reverse mortgage to improve their incomes, lifestyles, and monthly cash flow. These are just a few examples of how reverse mortgages work to your advantage:
- Keep more money on hand to pay for everyday bills and expenses.
- Eliminate or reduce credit card balances or other debts.
- Help with healthcare expenses, making it easier to age in place.
- Set aside funds to help pay for long-term care in the future.
- Make updates, repairs, or modifications to your home to live more comfortably.
- Lower your taxable income: avoid making taxable withdrawals from 401 or other retirement plans by replacing the money with income tax-free reverse mortgage funds4.
- Establish a line of credit for emergencies or occasional expenses.
- Help a child or grandchild with major expenses, like college tuition or a down payment on a home.
How Much Money Do I Qualify For From My Home /how Is The Amount Ill Receive From Reverse Mortgage Calculated
Several factors determine how much money you can qualify for with a Reverse Mortgage. The following factors determine the amount you can borrow all borrowers must be 55 years or older a , location, and the appraised value of the home. All factors considered, the maximum amount you may qualify for is up to 55% of the value of the home.
For more information and to see what your Reverse Mortgage can be worth, try our Reverse Mortgage Calculator.
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Who Can Pay Off A Reverse Mortgage
Reverse mortgages can be paid off by the borrowers or the borrowers heirs. If a borrower wishes to pay off a reverse mortgage, they can start making payments on the balance as explained above, or they can sell the home and use the earnings from the sale to pay off the balance.
If the borrower passes away or moves out of the home and the property is inherited by heirs, then they have the opportunity to pay off the loan. They can do this either by making payments, or by selling the home and paying down the reverse mortgage balance with the earnings from the sale. Note again that heirs also owe the lower of either 95% of the appraised value of the property or the remaining balance on the loan.
Reverse Mortgage Heirs Responsibility
When a loved one with a reverse mortgage passes away, heirs have several options they can pursue in regard to the fate of the home. Heirs may choose to keep the property by arranging financing to settle the HECM loan. They may also sell the home and keep any remaining proceeds from the sale that dont go toward the reverse mortgage loan repayment.
Alternatively, heirs may choose to walk away without any negative effect on their credit histories or sign a Deed-in-Lieu of Foreclosure to satisfy the loan. In order to process a reverse mortgage loan after it becomes due, it is important for heirs to act quickly and be informed of their choices.
If your parent or a loved one wants to start the reverse mortgage application process, our loan experts are standing by to assist you and answer questions you may have about the servicing of the loan or any maturity event that causes the loan to become payable.
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Reverse Mortgage Vs Home Equity Loan
Reverse mortgages and home equity loans can be used to serve different purposes. Because of the age requirement associated with Home Equity Conversion Mortgages, reverse mortgages are typically designed to provide an additional stream of income for homeowners in retirement. Seniors may rely on monthly payments from a reverse mortgage to help pay for day-to-day living expenses or cover health care costs not covered by Medicare or other insurance.
There are some catches, however. First, a reverse mortgage is not free money. It does have to be repaid eventually which usually involves the sale of the home after the homeowner has passed away. If youd like to leave your home to your children eventually, then youd need to make some other financial arrangement to ensure they have the money to settle up with your reverse mortgage lender.
Theres also a stipulation about residency. A reverse mortgage typically needs to be repaid if you move out of the home, including if you move into a nursing facility for 12 months or longer. There may be an exception if youre married and your spouse is still living in the home. But thats something to be aware of when considering a reverse mortgage.
A home equity loan doesnt have an age requirement. Qualification is based instead on how much equity you have in the home, your credit scores and your overall financial situation. In terms of how you can use a home equity loan, theyre often used for things like:
- Home improvements or repairs
What An Equity Release Agreement Costs
It’s not a loan, so you don’t pay interest. Instead, you pay fees such as:
- an application fee
- periodic service fees, potentially deducted in advance from your home’s equity
- a fee to end the agreement
Get the fund to go through projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there’s anything you’re not sure about.
What A Reverse Mortgage Costs
The cost of the loan depends on:
- how much you borrow
- how you take the amount you borrow
- the interest rate and fees
- how long you have the loan
Over time, your debt will grow and your equity will decrease .
See how much a reverse mortgage would cost over different time periods, such as 10 or 20 years.
Your lender or broker must go through reverse mortgage projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there’s anything you’re not sure about.
How Much Equity Will I Have Leftafter My Reverse Mortgage Is Repaid
The amount of equity you have left in your homeafter repaying your reverse mortgage will depend onhow much money you borrow, the interest rateand how long you have the loan,and the value of your home when it is sold.
To understand how a reverse mortgage works,let’s say the value of your home is $450,000 and you take outa reverse mortgage of $50,000, leaving you with $400,000 in equity.
What if the value of your home stays the same?
Over 20 years, your debt will grow from $50,000 to $272,060.If the value of your home staysthe same over this time,your remaining equity will be $177,940 .
What if the value of your home goes up?
If the value of your home goes upat the rate of 3% per year,after 20 years your home will be worth $812,750so your remaining equity will be $540,690 .
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