5 Ways to Get Out of a Reverse Mortgage

Many seniors explore reverse mortgages to finance transitions into nursing or retirement homes, using their home equity to cover care expenses without immediately selling their homes. This financial tool offers a way to maintain homeownership and manage financial needs during a potentially stressful time.

If you’re contemplating or already have a reverse mortgage, understanding your exit strategies is crucial. Life changes, whether due to financial shifts, relocation desires, or estate planning, can make knowing how to leave a reverse mortgage as important as entering one. This guide details several exit options to align with your long-term financial goals and ensure peace of mind.

Table of Contents

1. 1. Exercise your right of rescission
2. 2. Sell the home
3. 3. Pay off your mortgage in full
4. 4. Refinance the reverse mortgage into a traditional mortgage
5. 5. Qualify for a deed in lieu of foreclosure
6. Where to get advice
7. FAQ

1. Exercise your right of rescission

Who it’s for and what it is

If you’ve just closed on a reverse mortgage but are having second thoughts, you’re entitled to cancel within three business days, not counting Sundays or public holidays. This “right of rescission” is a safeguard for new borrowers, allowing you to withdraw from the agreement without any penalties or tax implications.

To cancel, send a written notice to your lender within the three-day period. Using certified mail with a return receipt is advised to ensure proof of delivery. The lender must then refund any fees paid within 20 days.

This immediate cancellation option resets your financial situation to its state before the reverse mortgage, as if the agreement never existed.

Should you do it?

Opting for rescission is straightforward if you realize right away that a reverse mortgage isn’t right for you or if a better financial alternative arises.

---

Tip

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

---

2. Sell the home

Who it’s for and what it is

List your property, sell it, and use the proceeds to clear the reverse mortgage balance. If the sale price exceeds your mortgage, the extra funds are yours. For example, a home selling for $300,000 with a $200,000 mortgage balance nets you $100,000.

Reverse mortgages don’t require you to pay more than your home’s value. If the sale doesn’t cover the mortgage, you’re only liable for 95% of the appraised value, with mortgage insurance covering any shortfall.

If you are considering moving to a nursing or retirement home, selling your home can not only provide the necessary funds to cover those expenses but also offer a straightforward way to exit your reverse mortgage. This method allows you to convert your home equity into liquid assets at a time when financial flexibility is crucial. Ensure the timing of the sale aligns with favorable market conditions to maximize your financial return and manage care costs.

Should you do it?

This method is suitable if you’re downsizing or moving into assisted living, allowing you to settle the loan without tapping into your savings. However, consider the housing market’s impact on your sale timing and price. Also, selling could affect your eligibility for benefits such as SSI due to temporary income increases.

3. Pay off your mortgage in full

Who it’s for and what it is

Opting to pay off your reverse mortgage in full is suitable if you aim to retain your home for inheritance or ensure a non-borrowing spouse can remain there. This approach requires settling the entire loan balance—comprising the borrowed amount, accrued interest, and any applicable fees—either all at once or through gradual payments.

This option is advantageous for ensuring stability for residents after the borrower’s death. However, it demands substantial financial resources, potentially exceeding your home’s current value, without the safety net of mortgage insurance to cover any deficits as in a home sale.

Should you do it?

Consider this route carefully, evaluating whether it will strain your retirement savings. Unlike typical conditions where repayment isn’t due until the home is sold or the borrower passes away, paying off early requires careful financial planning to ensure it doesn’t jeopardize your long-term security.

4. Refinance the reverse mortgage into a traditional mortgage

Who it’s for and what it is

Refinancing into a traditional mortgage could be ideal if you have good credit and a stable income. This option allows you to keep your home by converting your reverse mortgage into a conventional loan, which requires regular monthly payments over a term of 15 to 30 years.

This approach is suitable if your financial situation has improved significantly since taking out the reverse mortgage. It involves applying for a new loan, undergoing credit and income checks, and handling closing costs. Your monthly payments will depend on your credit score, the loan amount, and the interest rate you secure.

Refinancing your reverse mortgage into a traditional mortgage may be strategic if you anticipate future long-term care needs and prefer to secure a more stable, predictable funding source to manage these expenses.

Should you do it?

Refinancing can offer more favorable terms and stability, but it’s crucial to assess whether you can commit to the long-term financial obligation. It allows you to maintain homeownership and systematically reduce your mortgage balance.

If refinancing seems like the right decision for you, these are our highest-rated mortgage refinance companies:

5. Qualify for a deed in lieu of foreclosure

Who it’s for and what it is

When a reverse mortgage becomes untenable, perhaps due to a failure to meet ongoing maintenance, insurance, or tax obligations, or because the homeowner no longer resides at the property, a deed in lieu of foreclosure offers a last-resort exit strategy. This approach allows you to voluntarily transfer your home’s title to the lender, thus satisfying the debt and avoiding the foreclosure process.

To initiate a deed in lieu of foreclosure, you must first contact your lender to see whether it will agree to this arrangement. If so, you will sign the necessary legal documents to transfer ownership of the property.

Should you do it?

Opting for a deed in lieu can bypass the public and potentially lengthy process of foreclosure. However, it means relinquishing your home, which is a significant step. Before making this decision, it’s wise to consult with a HUD-approved housing counselor to ensure you understand the consequences.

Moreover, some lenders offer “cash-for-keys” programs to aid with relocation costs, and it’s crucial to negotiate a waiver of any remaining debt to protect your financial future.

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.

Takeaways

You can approach exiting a reverse mortgage through various methods, each tailored to different needs and circumstances. Whether it’s exercising the right of rescission shortly after closing, selling the home to pay off the mortgage, repaying the mortgage in full to retain property, refinancing into a traditional mortgage, or choosing a deed in lieu of foreclosure, understanding your options enables better financial planning.

For those still in the planning stages or contemplating entering into a reverse mortgage, evaluating all potential future scenarios is crucial. Alternatives such as home equity loans and lines of credit or home-sale leaseback arrangements could offer more flexibility and allow for aging in place without the complex long-term financial commitments of a reverse mortgage.

For those facing the prospect of financing long-term care, understanding the flexibility and implications of reverse mortgages is crucial. These tools can be structured to ensure you have access to needed funds while preserving your home as an asset for future financial security or eventual sale to cover more comprehensive care arrangements

Before proceeding, we recommend consulting with a financial advisor or housing counselor to ensure that your chosen strategy aligns with your long-term financial and housing goals.

FAQ

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

Exiting early may involve prepayment penalties. The full loan balance, including accrued interest and fees, must be repaid immediately.

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

Refinancing depends on factors such as your credit, income, age, and home equity. You must ensure new mortgage payments are manageable within your budget.

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

The loan is treated as a non-recourse loan; you or your heirs will not pay more than the home’s sale price to settle the debt.