How Do You Pay Back a Reverse Mortgage?

If you or a loved one has a reverse mortgage, or are considering one, you should know the many ways you can repay it, including selling the home, refinancing, or taking out a new mortgage. 

The right strategy depends on whether you want to keep the home. Here is a closer look at your options.

How does repayment on a reverse mortgage work? 

You begin repaying a reverse mortgage once you no longer occupy the home as your primary residence. Unlike traditional mortgages or home equity lines of credit, where you make monthly payments to a lender, the lender pays you instead.

A reverse mortgage can be appealing because it allows you to access your home’s equity without making monthly payments. This can be useful for older individuals who often have fixed incomes but need extra cash for various expenses.

A reverse mortgage must be repaid when the primary borrower:

• Passes away
• Sells the home
• No longer occupies the home as your primary residence

If you pass away while still living in your home, your heirs often must sell your home to repay the reverse mortgage. Any excess funds from the sale to go to your estate or heirs.

A critical distinction of a reverse mortgage is the lack of monthly mortgage payments. Instead of monthly payments, interest accrues monthly, increasing the principal amount until it is time to repay the loan. You don’t make monthly payments while interest accrues.

You or your heirs must repay the reverse mortgage within a certain period, usually within 30 days of receiving a repayment notice. However, that time could be as long as six months after you leave the home.

Reverse mortgages are complex financial products, and it’s crucial to understand the terms, conditions, and potential risks before entering into one. We recommend consulting with a qualified financial professional or housing counselor.

As interest rates rise, the amount you can borrow goes down. Because your age and interest rate fluctuations have a direct impact on the loan balance, it’s best to understand your needs and payment options so you can decide whether a reverse mortgage makes sense sooner rather than later.

Chloe Moore, CFP®

Reverse mortgage repayment options

The most common reverse mortgage repayment options include selling the property, refinancing the reverse mortgage, or paying off the mortgage balance with other funds. 

The best choice depends on your circumstances and your family. It’s important to consider all the options and choose the one best suited to your situation. You can click the repayment option in the table below to learn about who it’s best for—or keep reading to see more about all three.

Repayment option	Best for
Sell the home	When the borrower permanently moves out
Refinance the mortgage	When heirs want to keep the property after the borrower vacates
Pay off the mortgage with other funds	When the borrower or heirs have sufficient funds from other sources

Sell the home

If you’re willing to move, selling your home to get out of a reverse mortgage could be an option. No special requirements exist; 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 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 settling your loan without dipping into your savings or retirement. But selling a home can be time-consuming, and the current housing market can significantly impact 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. 

Refinance the reverse mortgage into a traditional mortgage

Refinancing could be a solid 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. 

Read More

Mortgage Refinance Calculator 

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 wise 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. If that sounds like too long a time frame, this may not be the best option.

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 be responsible for closing costs.

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Best Mortgage Refinance Companies 

Pay off the mortgage with other funds

Paying off your reverse mortgage is best if you want to keep your home—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 just 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 smart 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. It can be a good option, but only if you have enough money to repay the loan.

With a reverse mortgage, 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, 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 option is feasible. 

Use a home equity sharing agreement to pay off the reverse mortgage

A reverse mortgage is a useful way to tap into your home equity without taking on additional debt. However, it must be repaid eventually, which can create financial strain for you or your heirs. A home equity sharing agreement is another approach that avoids additional debt.

What it is

A home equity sharing agreement, also known as a home equity investment, gives you access to funds in exchange for sharing a portion of your home’s future appreciation with an investor. In this arrangement, you receive a lump-sum payment you can use to cover various expenses.

However, this loan must also be repaid, along with a portion of your home’s appreciation. This typically happens at the end of the agreement or when you sell your home.

For instance, suppose you have a $400,000 home and need $50,000 for a major expense. You enter into an equity-sharing agreement with an investor who gives you $50,000 for a 20% stake in your home’s future appreciation.

If you sell the home 10 years later for $500,000, you must repay the investor the original $50,000, plus 20% of the appreciation, or $20,000. That means the investor receives a total payment of $70,000 when you sell the home.

Should you do it?

A home equity-sharing agreement can have significant costs, especially if you live in a market with rapidly rising home values. Receiving a lump-sum payment without additional debt is a plus, but you might end up paying a substantial amount in exchange.

However, whether you should consider this arrangement depends on your housing values. It may not be the best choice if housing values are growing quickly.

But if home values are stagnant or even falling, this might benefit you as a homeowner. If home values fall when you sell your home, you and the investor share the loss. In other words, instead of collecting an additional fee, they must cover that portion of the depreciation instead.

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3 Best Home Equity Sharing Agreements 

How long do your heirs have to repay a reverse mortgage? 

Your heirs often have up to six months to repay a reverse mortgage after your passing or the property is no longer your primary residence. However, they’ll need to pay close attention to the lender’s required time frames and ask for an extension if necessary.

The reverse mortgage becomes due once the borrower passes away or moves out of the home. The lender notifies the heirs of the outstanding balance and provides options for repayment.

You can expect the lender notification to require full repayment in 30 days. However, you can often extend it to six months. The goal is to give your heirs time to work out payment arrangements, such as selling the home, refinancing the loan, paying it off with cash, or giving the home to the lender.  

Given the initial demand for payment is so short, it’s crucial for your heirs to contact the lender right away to work out arrangements. They may also find it helpful to speak with a housing counselor or an attorney to ensure they understand what’s required.

Tip

Living in a long-term care facility, such as a hospital or nursing home, for more than 12 months in a row counts as permanently vacating the home. Be sure your heirs are aware that repayment in full on your reverse mortgage will be triggered once this happens.

Should you repay your reverse mortgage early?

Paying off a reverse mortgage early may make sense in certain situations, such as when your finances improve or you plan to sell your home. However, it may not be the best choice if you plan to stay in your home or have financial constraints. Here’s when to consider repaying your reverse mortgage early and when you should keep paying.

Consider if …	Don’t consider if …
You want to preserve your home equity for your heirs	Repaying the loan early would strain your budget
Your finances are improving	You plan to stay in your home
You plan to sell your home	Leaving your home to heirs isn’t a priority
You want to pay less interest	You can get higher returns by investing your money elsewhere

By paying off the loan early, you can avoid accumulating additional interest over time, which can save a significant amount of money. Early repayment also eliminates the risk of burdening your heirs with settling the reverse mortgage debt after your passing.

Before deciding to repay early, assess your overall financial situation, including your retirement savings, investment portfolio, and other liabilities. 

Consulting with a financial professional, housing counselor, or attorney may be a good way to help you determine whether early repayment is the right choice for you.

It’s important to understand the different payment options available with a reverse mortgage. Certain options give you faster and easier access to your home equity, which can come with significant risk. Knowing your needs and having a plan for how you will use the money beforehand is crucial so you can reduce the risk of running out of money.

Chloe Moore, CFP®

Other ways to get out of a reverse mortgage

While repaying a reverse mortgage directly is the simplest way to get out early, you may not have enough cash for this option. However, there are a few other ways to potentially end the agreement. While these can also be viable strategies, they won’t be available to all borrowers with a reverse mortgage, which is why they’re listed separately.

Exercise your right of rescission

The right of rescission applies to anyone who has closed on a reverse mortgage within the past three business days. You don’t need to meet any special requirements to take this step; it’s available 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. 

Qualify for a deed in lieu of foreclosure

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.

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How to Avoid a Reverse Mortgage Foreclosure 

FAQ

Who is responsible for paying off a reverse mortgage?

The borrower or their heirs are responsible for paying off a reverse mortgage. Ideally, the loan is repaid through the sale of the home, with an appraisal determining the home’s value upon the borrower’s death or if they move. Provided the loan balance is less than the appraised value, any remaining equity is paid to the borrower or their estate.

Are there tax implications to repaying a reverse mortgage?

There can be tax implications upon repaying a reverse mortgage. The principal and interest on a reverse mortgage are not taxed as income. However, if the house sells for more than what’s owed, the excess might result in capital gains tax. It’s best to consult a tax professional to understand the possible implications for individual situations.

What if I can’t repay my reverse mortgage?

If you’re unable to repay your reverse mortgage, certain protections exist. The reverse mortgage is a non-recourse loan, meaning the lender’s recovery is limited to the home’s value. Your retirement accounts, income, or other assets are shielded. If the home sale isn’t enough to repay the loan, the lender absorbs the difference.

Read More

How to Stop a Reverse Mortgage Foreclosure

Do you have to make monthly payments on a reverse mortgage?

You do not need to make monthly payments on a reverse mortgage. Instead, the interest is added to the loan balance each month, and the total amount is due when the last borrower leaves the home. If you make payments to manage the loan balance, you can pursue flexible repayment options with the lender.