How to Get Out of a Reverse Mortgage

If you’re rethinking your reverse mortgage, know that you have options. A reverse mortgage lets you tap into your home equity without making money payments. The two primary requirements are that you’re at least age 62 and live in the home as your primary residence. 

If you have a reverse mortgage, you might have thought it would be an ideal way to help cover living expenses in retirement. But maybe now your financial situation is different, you’re considering a move, or you want to pass your home on to your loved ones.

You can take several paths to get out of a reverse mortgage. We’ll cover each option below so you can leave your loan behind in a way that makes sense.

How to get out of a reverse mortgage

Getting out a reverse mortgage can range from super simple to extremely difficult depending on how long you’ve had your loan, what your current financial situation is like, and the current housing market.

We’ll go into each of your options below but in general, here’s how to exit a reverse mortgage: 

• Exercise your right of rescission
• Sell the home
• Pay off your mortgage in full
• Refinance the reverse mortgage into a traditional mortgage
• Qualify for a deed in lieu of foreclosure

Ask the expert

Natalie Slagle

CFP®

You might want out of a reverse mortgage if your financial situation has changed. Perhaps you received an inheritance, have help from another family member, or decided to downsize to a smaller home.

Exercise your right of rescission

Who it’s for

The right of rescission is for anyone who has just closed on a reverse mortgage in the past three business days. You don’t need to meet any special requirements to take this step; it’s a right provided to all reverse mortgage borrowers who change their minds after closing. 

What it is

This right allows you to cancel the reverse mortgage within three business days after closing, not including Sundays or legal public holidays. 

To exercise it, you must notify the lender in writing within this timeframe letting them know you want to rescind the deal. The lender then has 20 days to return any fees or funds that have been paid. 

The Consumer Financial Protection Bureau recommends sending your written cancellation request via Certified Mail and asking for a return receipt so you have proof the lender has received it. 

Should you do it?

Consider this option if you have second thoughts or find a better financial solution shortly after closing. Since the mortgage is being canceled, exercising your right of rescission has no penalty, tax implications, or effect on your heirs. 

It puts you back in the position you were in before taking out the reverse mortgage, so it’s as if it never happened. 

Remember: You don’t need a reason for rescission. Simply saying you’ve changed your mind is enough.

Sell the home

Who it’s for

If you’re willing to move, selling your home to get out of a reverse mortgage could be an option. There are no special requirements; you must be prepared to move out and handle the sale process.

What it is

Selling your home involves putting it on the market, finding a buyer, and using the proceeds from the sale to pay off the reverse mortgage balance. Any remaining equity after paying off the loan is yours to keep. 

So if your home sells for $300,000 and your reverse mortgage balance is $200,000, you’d get to keep the extra $100,000.

There’s no need to worry if the sale price doesn’t cover your reverse mortgage balance. The loan is set up so you won’t owe more than the home’s value. If the home is worth less than the loan amount, you or your estate can pay off the loan at 95% of the home’s appraised value. 

For example, if your home is appraised at $250,000 but the reverse mortgage balance is $275,000, you would only need to pay $237,500 (95% of the home’s value), and the mortgage insurance included with your reverse mortgage covers the difference.

Should you do it?

Selling provides a clean break from your reverse mortgage. It can be a good choice if you’re ready to downsize, relocate, or move into an assisted living facility. 

The most significant benefit is that you can fully settle your loan without dipping into your savings or retirement. But selling a home can be time-consuming, and the current housing market can have a big impact on your timeline and selling price. 

Sometimes, you may owe capital gains taxes when you sell a house. And if you receive any government assistance, such as Social Security Income (SSI) benefits, the sale of a home could affect your eligibility if your income increases enough. 

Pay off your mortgage in full

Who it’s for

Paying off your reverse mortgage is best if you want to keep your home still—maybe so your loved ones can inherit it, or a non-borrowing spouse can stay in it after you pass away. But you’ll need enough money to repay your loan over time. 

What it is

A reverse mortgage is a loan, so you simply start paying it back with this option. You’ll repay the entire amount you owe, including the borrowed money, accrued interest, and any associated fees. You can make this payment in a lump sum or through multiple payments over time.

Should you do it?

Paying off your reverse mortgage in full can be a good move if you have a non-borrower who wants to continue living in the home after you pass away or if you wish to leave your home to a loved one. 

The biggest downside of this option is that you’ll need to pay off your total loan balance in full—even if the balance is higher than your home’s value. Mortgage insurance won’t cover the difference like it would if you sold the home.

Also, make sure that paying off your mortgage won’t drain your retirement savings or leave you strapped for cash. Typically, you’re not required to pay off the reverse mortgage until you sell the home, move out, or pass away, so consider whether this is a feasible option. 

Refinance the reverse mortgage into a traditional mortgage

Who it’s for

This could be a good option if you have good credit and enough income to cover monthly mortgage payments. It would allow you to keep your home while paying the loan over time. 

What it is

With this option, you would apply for a conventional loan, and if approved, the money from this new loan would be used to pay off the reverse mortgage balance. You’ll then make monthly payments on the new mortgage, just like any other home loan. 

Should you do it?

Refinancing could be a good idea if your income has increased or you want to keep your home. But you’ll need to be comfortable with monthly mortgage payments that could last 15 to 30 years. This is a long timeframe—and it could strain your budget if your income isn’t stable. 

Your new monthly mortgage payment will be based on your credit score, how much you borrow, and the interest rate you qualify for. You’ll also need to pass credit and income checks, and you’ll be responsible for closing costs.

Qualify for a deed in lieu of foreclosure

Who it’s for

If your reverse mortgage has come due—maybe because you no longer live in your home or can no longer keep up with the maintenance, insurance, and taxes—a deed instead of foreclosure is a last-resort option. It’s where you leave your mortgage and turn your home over to the lender.

What it is

A deed in lieu of foreclosure is when you voluntarily hand over your home’s title to the lender to fulfill the debt and avoid foreclosure. 

To initiate this, you’ll contact your lender to see if they’ll agree to this arrangement. You’ll sign legal documents to transfer their property ownership if they do.

Should you do it?

Opting for a deed in lieu can help you sidestep the public and often lengthy foreclosure process. But it does mean giving up your home. Before deciding, consider speaking with a HUD-approved housing counselor for guidance on your situation. 

Some lenders offer “cash-for-keys” programs to assist with relocation costs, and you should also seek a written waiver for any deficiency to protect yourself financially. 

Ask the expert

Natalie Slagle

CFP®

The best option depends on your financial needs and long-term goals. If reducing your financial obligations, downsizing, and leaving this particular home for your heirs is not a priority, you may want to consider selling. Knowing your current and future financial needs will help you best decide how to get out of your reverse mortgage.

Where to get advice to get out of a reverse mortgage

You can turn to several professionals for advice if you’re considering getting out of a reverse mortgage. These experts can help you understand your rights and determine the best action based on your situation. 

• Visit the HUD website to find a local counselor if you need help understanding your options for existing a reverse mortgage program. These counselors offer free or low-cost advice.
• Contact an attorney with experience in real estate or elder law if you need help with the legal aspects of exiting a reverse mortgage. 
• Contact a certified financial planner or advisor if you need help considering how existing a reverse mortgage will impact your estate plans or retirement savings.

If you suspect you’re a victim of a reverse mortgage scam or a predatory situation, report the scam to the Consumer Financial Protection Bureau (CFPB). Consider contacting an attorney who can help.

FAQ

What are the financial implications of getting out of a reverse mortgage early?

Cutting short a reverse mortgage has numerous financial implications. For instance, you might incur prepayment penalties. 

The loan balance, including loan principal, accrued interest, and mortgage insurance, needs immediate repayment. You must also square up any closing costs you avoided by choosing a reverse mortgage.

Can I sell my home if I have a reverse mortgage?

Yes, you can sell your home with a reverse mortgage. However, you must use the proceeds from the sale to repay the reverse mortgage in full. Any leftover funds will remain with you. 

But if the mortgage balance exceeds the home’s sale price, you’re not responsible for the difference unless you sell the home to a family member.

Is refinancing a reverse mortgage into a traditional mortgage always an option?

Refinancing a reverse mortgage into a traditional one is not always an option. It depends on age, home equity, income stability, and credit score. Should you qualify, you’ll need to ensure that the new mortgage payments fit your budget.

What happens if the reverse mortgage balance exceeds the home’s value?

In cases where the reverse mortgage balance exceeds the home’s value, it’s treated as a non-recourse loan, meaning you or your heirs are not required to repay more than the home’s sale price. However, if the family inherits the property, they can purchase it for 95% of the appraised value.

How does a reverse mortgage affect my heirs and their inheritance?

A reverse mortgage will affect your heirs and their inheritance. Once the homeowner passes away, the beneficiaries must repay the loan balance to retain the house. If they are unable or unwilling to do so, the lender may sell the home to recover the loan balance.

Can I rent out my home if I have a reverse mortgage?

Typically, you can’t rent out your home with a reverse mortgage. Maintaining the home as your primary residence is a requirement stipulated in a reverse mortgage agreement. There are exceptions, but failure to meet this condition could lead to foreclosure.

What are the risks of defaulting on a reverse mortgage?

Defaulting on a reverse mortgage comes with significant risks. These include possible foreclosure, a negative impact on your credit score, and the potential loss of your home. To avoid such scenarios, it’s crucial to remain current with property taxes, homeowners insurance, and maintenance costs.