How to Get Out of a Reverse Mortgage: What You Can Do
Circumstances can change after someone takes out a reverse mortgage. Fortunately, you may be able to get out of your reverse mortgage.
Chris Scott
Contributing Writer at Tally
December 17, 2021
For many, the American dream includes buying a house and growing old in it with your family. But what happens if you tie up a lot of equity in your home and don't have cash on hand for things like retirement or medical bills?
In these circumstances, one option you have is to take out a reverse mortgage on your home.
A reverse mortgage is a loan that allows you to borrow against the equity you have in your home. While a convenient option for many, it's possible that circumstances may change after you take out a reverse mortgage, and you no longer need it.
In this article, you’ll learn what a reverse mortgage is, how it works and the steps you can take to get out of your reverse mortgage.
What is a reverse mortgage?
A reverse mortgage is a lending option that allows homeowners to borrow against the value of their homes. To be eligible, homeowners must be at least 62 years of age.
Reverse mortgages are unique because borrowers aren't required to make any loan payments to their lender. This is different from a forward mortgage, which is the type of mortgage used to initially buy a home. Instead, borrowers receive funds from their lender in the form of a:
Lump-sum cash payout
Line of credit
Monthly payment/stipend
Borrowers will owe interest on these payments, but the lender rolls the interest into the loan balance. Borrowers don't need to pay anything upfront to the lender. This makes the reverse mortgage an enticing option for seniors who have tied up a lot of their equity in their homes and don't have cash on hand to cover their living expenses or medical bills.
Without a reverse mortgage, some seniors wouldn't be able to access this equity unless they sold their home. Reverse mortgage borrowers don't have to pay taxes on their loan proceeds.
Reverse mortgages are also unique from traditional mortgages because they work in the opposite manner. With a forward loan, the homeowner's debt decreases as the equity in their home increases. With a reverse mortgage, the opposite is true. As debt increases, home equity decreases.
It's possible for you to take out a reverse mortgage loan if you're still making forward mortgage payments. However, you'll need to use the funds from the reverse mortgage to pay off the forward mortgage in full. You can't make monthly mortgage payments on a forward loan while receiving money via a reverse loan.
Lastly, reverse mortgages may sound similar to a home equity loan or line of credit (HELOC). However, those lending options require lenders to check your credit. No credit check is needed for a reverse mortgage.
How do reverse mortgages work?
With a reverse mortgage, homeowners borrow against the equity they have in their home, using their home as collateral. There are a few circumstances that'll put an immediate end to the reverse mortgage. These occur when the homeowner:
Moves away
Sells the home
Transfers the title of the home
Passes away
Fails to pay homeowner's insurance or property taxes
When one of these events occurs, the payments from the lender will cease. The lender will draw up the total amount owed on the loan. This amount will include:
The principal balance
Interest
Mortgage insurance
Fees
The homeowner is then responsible for paying this immediately. Funds are taken from the proceeds of the sale. If the homeowner has passed away, the funds are taken from the estate. Heirs also have the choice of paying off the value of the reverse mortgage if they wish to instead keep the home.
There are three types of reverse mortgages available:
Home equity conversion mortgages (HECMs) are used when the home's value is $822,375 or less. This is the only reverse mortgage insured by the federal government, according to the U.S. Department of Housing and Urban Development (HUD). You may see these referred to as Federal Housing Administration (FHA) reverse mortgages as well.
Single-purpose reverse mortgages typically come with lower interest rates. You may find these types of loans offered by state, local and non-profit agencies.
Proprietary reverse mortgages are backed by private lenders. These are also known as "jumbo reverse mortgages" and are meant for those who exceed the HECM limits.
Though it may vary from lender to lender, typically the home's value used for the loan is based on the appraised market value. There are measures in place to protect borrowers if the reverse mortgage loan balance becomes greater than the appraised value of the home.
Can I learn how to get out of a reverse mortgage?
As you can see, a reverse mortgage may be a tempting borrowing option, especially as you get older. But what happens if you were to take out a reverse mortgage, only for your circumstances to change? Can you get out of your reverse mortgage?
The short answer is "yes," it's possible to get out of a reverse mortgage.
As mentioned previously, there are qualifying events that will automatically cause your reverse mortgage to expire. Other options for getting out of a reverse mortgage include:
Right of rescission - You have up to three business days after closing to cancel a reverse mortgage without penalty. This is known as a "right of rescission." You'll have to notify your reverse mortgage lender in writing. Lenders then have 20 days to return any money you had paid for financing or origination fees.
Repayment - If you're past the right of rescission period and you're not willing to sell your home, you can get out of your reverse mortgage via repayment. You can repay your lender the amount you borrowed plus any interest. Because you're not selling your home, you'll have to use out-of-pocket funds to pay off the mortgage balance. Some lenders may be willing to let you install a payment plan, while others will require a lump-sum payment.
Refinancing - The last option you have to get out of your reverse mortgage is to refinance. There are two ways that you can go about refinancing. If current interest rates are lower than what you're paying on your existing mortgage, you can refinance with your lender to secure a better rate. You could also refinance to change from a variable rate to a fixed-rate loan, which will lock in your interest rate. You'll have to pay closing costs to refinance your loan.
Taking out a new loan - The other way you can go about refinancing is by taking out a new loan. For instance, you can take out a personal loan and use that to repay your reverse mortgage. You may do this if there are better interest rates available or if you'd like to maintain equity in your home without having to sell.
Preparation for retirement can help you find financial freedom
A reverse mortgage can be an appealing option if you or a loved one has a lot of money tied up in the equity of your home. However, the money that you borrow is due upon your death or the sale of the home. Depending on how long your reverse mortgage lasts, it's possible that all of the proceeds from the sale of your home go toward repaying your reverse mortgage lender, leaving you short on cash or assets.
It's important to do your research. Talk with trusted financial advisors and real estate agents to determine whether a reverse mortgage is right for you. If you discover that your circumstances change, these individuals may provide tailored advice to teach you how to get out of a reverse mortgage.
A reverse mortgage also demonstrates the importance of saving money and preparing for retirement. Having enough money saved for retirement can put you on the path toward financial freedom.
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