How Do You Pay Back a Reverse Mortgage?

The original intent of a reverse mortgage structure was to leverage home equity to keep seniors in possession of their homes permanently, with the lender being repaid by their estate through a property sale. Today’s contracts, however, offer more options and potential outcomes. 

So, after you sign the contract, how do you pay back a reverse mortgage? 

Like with a traditional mortgage, you (or your heirs) can pay off a reverse mortgage through a property sale or by leveraging other cash or assets. That said, there’s a little more to it. As with any major financial decision, there are several reverse mortgage pros and cons that can impact your choice of when and how to repay the loan.

Overview of Reverse Mortgage Repayment

Reverse mortgages are a type of mortgage loan that must be repaid to the lender, including the amount borrowed plus accrued interest. You can use financial services tools like a reverse mortgage calculator to determine the amount that you still owe. 

Repayment is required in certain circumstances, including the death of the reverse mortgage borrower or transfer of title. However, like any loan, you can also opt to repay the loan proceeds at any time to discharge the debt. 

Nearly all reverse mortgages in the U.S. are home equity conversion mortgages (HECMs) which are insured by the Federal Housing Administration (FHA). This FHA backing means that the government will cover a portion of repayment if your home value is lower than the amount due. If you or your heirs sell the property, so long as it sells for the lesser of 95% of the home’s or loan’s value,² FHA insurance will cover the remaining amount due on a HECM reverse mortgage.

So, how much money do you get from a reverse mortgage? This amount can vary based on several factors. Of course, it’s key to have certainty about the full amount you’ve been loaned before you begin the process of repayment.

Repayment Conditions and Triggers

A reverse mortgage must be repaid upon specific changes in circumstances. Repayment triggers occur at these times:  

1. Death of the Borrower

A reverse mortgage payment cannot be transferred. It must be repaid upon the borrower’s death, or the last surviving borrower’s death if there are multiple borrowers. 

HECM loans provide one exception to this rule. A surviving spouse can remain in the property after the mortgage borrower’s death so long as they qualify as an eligible non-borrowing spouse according to the U.S. Department of Housing and Urban Development (HUD) rules.³

2. Change in Principal Residence

If the home is no longer the borrower’s principal residence, the reverse mortgage must be repaid. 

This principal residence clause encompasses not just the “home in which the borrower resides the majority of their time” but also the continuity of occupancy. If the borrower is away from the property for longer than 12 consecutive months (without a co-borrower remaining in residence), then repayment is triggered.³ 

This is true regardless of circumstance, even if the borrower is temporarily resituated at a healthcare facility.

3. Property Sale or Transfer

Reverse mortgage loans, just like any other type of mortgage, must be repaid if the property changes hands. This includes both a traditional property sale as well as transferral of ownership within a family unit. 

4. Threat to Property Value

Reverse mortgage contracts also mandate actions that ensure the property will not unnecessarily lose value or elicit liens. Borrowers must: 

• Maintain appropriate homeowners insurance
• Stay current on property tax payments 
• Keep the property in good repair 

If these conditions are not met, repayment of the loan balance can be demanded by the reverse mortgage lender, typically resulting in sale of the home. 

Options for Repaying a Reverse Mortgage

Once you’ve decided to move forward, how do you repay a reverse mortgage? Sale of the property isn’t the only option. 

Reverse mortgages can be repaid by: 

• Direct payment – If your circumstances allow it, you can simply repay the existing mortgage balance in full through other assets. For some reverse mortgage borrowers, this might be prompted by receiving an inheritance, gift, or other injection of funds.

• Family retention – If a child or individual decides to keep the family home, they could arrange with the borrower to pay off the reverse mortgage in full in exchange for inheritance rights or immediate transfer of the title. 

• Property sale – As with any other mortgage payment, you can sell your home, pay off the debt, and keep any additional proceeds. If the sale doesn’t cover the amount due, FHA backing will pay off anything beyond the lesser of 95% of the home’s or loan’s value.

• Sell and stay transaction - You can sell your home and then lease it back, continuing to live there as a renter.

Preparing for Repayment

When you consider repayment of a reverse mortgage, start by deciding whether your goal is to move out or remain living in place. You can repay the loan with a cash injection, through funds borrowed from or provided by family, or by selling your property and using the proceeds. 

Can you refinance a reverse mortgage? In short: yes, but this option may not be the most suitable if you want to avoid accruing more debt.

If you want to continue living in your home without a reverse mortgage, there are options to leverage your home equity and pay off your mortgage without incurring additional debt. 

Unlike a reverse mortgage, Truehold's sell and stay transaction is not a loan, so there is no debt left over for you to repay. With a sell and stay transaction, you sell your property and remain in the home as a renter. This allows you to avoid the stress of open houses and seemingly endless closing costs associated with a traditional home sale.

As soon as the sale closes, you can use your equity to repay your reverse mortgage. Truehold covers property tax, property insurance, and essential repairs, so you can live easier in your home.

Find out more by calling us today. A Truehold representative will review the process and see if a sell and stay transaction fits your financial goals and situation. 

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Sources: 

1. Investopedia. Reverse Mortgages in America: The Statistics. https://www.investopedia.com/reverse-mortgages-america-statistics-5224801‍
2. Investopedia. How to Get Out of a Reverse Mortgage. https://www.investopedia.com/get-out-of-reverse-mortgage-5223770‍
3. Consumer Financial Protection Bureau. When Do I Have to Pay Back a Reverse Mortgage Loan? https://www.consumerfinance.gov/ask-cfpb/when-do-i-have-to-pay-back-a-reverse-mortgage-loan-en-236/

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