A reverse mortgage lets qualified older homeowners turn their home equity into cash that they can use in their later years. However, like any other loan, a reverse mortgage eventually needs to be repaid.
But can you pay back a reverse mortgage early? Yes, you can. While payments aren’t required as long as you live in the home, there are benefits to paying off a reverse mortgage early.
Key Takeaways:
- There are benefits to paying off your reverse mortgage early, such as reducing the amount you’ll owe in interest.
- There are several ways to pay off a reverse mortgage early, including regular payments and making a lump-sum payment.
- A home does not have to be sold or turned over to the lender when the reverse mortgage borrower no longer lives there. A family member can take over the reverse mortgage by paying the loan back or refinancing.
What Is a Reverse Mortgage?
A reverse mortgage is a loan for older homeowners to access their equity in the form of a line of credit, a series of regular payments, or a combination of the two.
The primary benefit of a reverse mortgage is that it doesn’t require monthly payments like a traditional loan. Instead of you paying the lender and increasing your equity, the lender pays you and your equity decreases. Once the borrower no longer lives in the home, the loan is repaid, typically using the proceeds from selling the house.
There are three primary types of reverse mortgages:
- Home equity conversion mortgages are insured by the Federal Housing Administration, and are by far the most common type.
- Proprietary reverse mortgages are offered by individual lenders, and have different rules and regulations.
- Single-purpose reverse mortgages are offered by certain government agencies and nonprofit groups, mostly to lower- and middle-income homeowners.
Can You Pay Off a Reverse Mortgage Early?
While you don’t have to pay off a reverse mortgage until you no longer live in the home, you can make payments ahead of schedule to reduce how much you owe when the loan comes due.
When does a reverse mortgage need to be paid back?
The most common type of reverse mortgage is an HECM. A reverse mortgage will need to be repaid when:
- You sell the home or transfer the title.
- You no longer use the home as your primary residence.
- You die.
- You fail to keep up with property taxes and homeowners insurance payments.
Keep in mind that reverse mortgages are negatively amortizing, so it can be beneficial to make payments before they’re due so that you can save on interest.
If there’s a co-borrower on the loan and you die, then the co-borrower will continue to receive loan payments. However, this also means that they’ll assume full responsibility to meet the terms of the loan and its ultimate repayment.
If you die and your spouse is not listed as a co-borrower, then they still may be able to stay in the home without taking on responsibility for the loan. If they qualify as an eligible non-borrowing spouse under the rules set by the Department of Housing and Urban Development, then they can stay in the home. Your spouse also may be considered an eligible non-borrowing spouse if you move into a health care facility and stay for more than a year.
Benefits of Paying Off a Reverse Mortgage Early
There are many benefits to paying off a reverse mortgage early. One important benefit has to do with interest.
Over time, the balance on your reverse mortgage grows, even if you don’t take additional money from the loan. This is because the lender charges interest on the outstanding balance. If you make payments that reduce the balance, less interest will accrue.
“The main advantage of paying off a reverse mortgage early is the flexibility you get when it comes to your retirement plans,” says Robert Scott, owner of Sell Land, a St. Louis-based homebuying company. “If you pay off your reverse mortgage early, you are freer to sell the house or move to another location since the remaining amount you still have to pay will considerably be less. It also prevents passing the burden to your loved ones in case you pass away without paying off the reverse mortgage.”
Reasons to pay off a reverse mortgage early
Here are some reasons why you might decide to pay off your reverse mortgage early:
- You have buyer’s remorse and no longer wish to give up your equity.
- You decide you prefer to leave your home to family or heirs.
- You need to move into assisted living or a nursing home.
- You live with someone who isn’t on the loan and would have to vacate the property if you move out or die.
- You no longer need the supplemental income.
- You don’t want to have to keep paying for homeowners insurance and maintenance costs.
Reasons to wait to pay off a reverse mortgage
One of the primary benefits of a reverse mortgage is that monthly payments aren’t required. You turn home equity into cash and don’t have to worry about a monthly payment like you would with a home equity loan or line of credit.
If payments aren’t required, then making payments is taking money out of your pocket. You might be saving money in the long run, but these loans are typically used by older homeowners who might be less concerned about the long term.
This is especially true if you have no heirs to pass on your home to. In that case, you can simply let the lender take your home when you move out or die, and never worry about making any payments on the loan.
Paying off a reverse mortgage is rarely a good idea, says Martin Orefice, CEO of Rent To Own Labs, a real estate company based in Orlando, Florida.
“Reverse mortgages work best as ways to access the equity in your home in advance of selling it,” he says. “Paying them off is usually not the best use of your money, and isn’t usually doable unless you’ve come across a new source of income.”
How Do You Pay Off a Reverse Mortgage?
If you’ve decided to pay off your reverse mortgage early, there are a few ways that you can do it.
Make regular payments
Perhaps the simplest option is to treat it like a home equity loan or line of credit. Make regular, monthly payments toward the balance, and eventually you’ll pay it off.
Consider this example: You’ve received a reverse mortgage and taken out $50,000 from it. The loan’s interest rate is 5%. If you choose not to make any payments, the loan’s balance will be $82,350 in 10 years. If you try repaying the loan during those 10 years, you’ll pay $530 per month. After 10 years, you’ll have repaid the loan and only paid $63,639 — meaning $18,711 less interest accrued on the loan.
Because payments aren’t required, you can always stop making payments if your situation changes, but you’ll still benefit from some interest savings.
Make a lump-sum payment
If you find yourself with a one-time windfall, you could use some of that money to pay off a portion of your reverse mortgage.
Continuing with the previous example of a $50,000 loan at a 5% interest rate, let’s say you decide to make a $25,000 payment five years after getting the loan. When you make the payment, the loan’s balance will be $64,168, so the payment will reduce that amount to $39,168. Five years later, the balance will have grown to $50,267.
Without the $25,000 payment, you would have had a balance of $82,350 after 10 years — meaning the lump-sum payment helps you save $7,083 in interest.
Pay off the remaining balance in cash
You also can pay off a reverse mortgage by paying off with cash the lesser of the balance on your loan, or 95% of the appraised value of the home. The loan will need to be repaid within 30 days of the death of the last surviving borrower. If your heirs need to sell the home to repay the loan, they’ll need to sell the property for at least 95% of the current appraised value.
Make payments before the maturation event
If you have the funds to do so, you also can make payments in advance of the time that the reverse mortgage will need to be repaid in full. This can help you save on interest and reduce the burden for you or your heirs once you no longer live in the home.
Stop receiving payments or making withdrawals
One way to reduce the speed at which your debt grows — but not actually repay the loan — is to stop taking money out.
Two common ways to get money from a reverse mortgage are to use it as a line of credit or to receive regular payments. If you stop taking payments, the balance will grow more slowly.
For example, let’s say you sign up for a reverse mortgage that gives you $400 every month. Assume the loan’s initial balance is $5,000 after fees and mortgage insurance, and that the loan’s interest rate is 5%. After 20 years, you’ll have received a total of $96,000 in payments, and owe $178,662 on the loan.
If, 10 years in, you decide to stop taking payments from the loan, you would have received a total of $48,000 in payments and your loan balance will be $70,607. After that, the only thing adding to the loan’s balance will be interest. In another 10 years, the balance of the loan will be $116,290 — which is $62,372 less than if you had continued taking payments from the reverse mortgage.
Refinance to a traditional mortgage
If qualified, you can refinance a reverse mortgage into a traditional mortgage to pay it off. Your new loan will provide the money for a reverse mortgage payoff, and your lender will start sending you monthly bills to pay off that loan. As you make payments on the traditional mortgage, the balance will decrease until it’s paid off.
Sell the house
If you want to sell your home, you’re allowed to do so even if there’s a reverse mortgage in place. However, you’ll need to use the proceeds of the sale to repay your reverse mortgage.
One benefit of HECMs is that they are nonrecourse loans. This means that even if the sale price isn’t enough to fully repay your loan, the lender cannot pursue you for the rest of the money. The FHA will reimburse the lender for the remaining amount.
Deed in lieu of foreclosure
If you’re worried about foreclosure, you can choose an arrangement involving a deed in lieu of foreclosure. If you go with this route, you’ll give the lender the deed to your home, and the loan will be considered paid in full. This lets you avoid having to make cash payments or deal with foreclosure.
How Can Family Members Take Over a Property With a Reverse Mortgage?
When the person taking out a reverse mortgage dies or moves out of their home, the reverse mortgage must be repaid. Often, this is done by selling the home or turning it over to the lender.
If family members want to take over a property with a reverse mortgage, they first need to repay the balance. Options include making a lump-sum payment, or refinancing the loan. They must pay the lesser of the outstanding balance or 95% of the home’s appraised value to keep the home.
There are different reasons why a family member may want to keep a property that has a reverse mortgage on it. For example, the home may hold sentimental value, or perhaps they want to use it as an investment or rental property. To do so, they can take out a new mortgage and use the balance to pay off the reverse mortgage.
FAQ: Prepaying a Reverse Mortgage
Here are answers to common questions about repaying a reverse mortgage early.
Heirs have 30 days from receiving the due and payable notice from the lender to satisfy the debt by paying it back, selling the home, or turning over the deed. However, heirs can receive an extension of up to one year to obtain financing to purchase the home.
After you close on a reverse mortgage, you have three days to cancel the loan without penalty. This is known as your right to recission. Your lender will refund any fees you paid to finance the reverse mortgage within 20 days.
To exercise your right to rescission, you need to notify your lender in writing within three days. It’s a good idea to send it by certified mail and get a return receipt so you have proof of when you sent it. Be sure to also save all communications you have with your lender.
No. Reverse mortgages do not have prepayment penalties.
The Bottom Line on Paying Off a Reverse Mortgage Early
Paying off a reverse mortgage early can give you and your heirs more freedom in how to use the home. It also reduces the amount of interest that will accrue. However, reverse mortgages don’t require payments, so if you’re unconcerned about what happens to your home when you move out, making payments might not be the right choice for you.
More From LowerMyBills:
- What Is a Reverse Mortgage, and How Does It Work?
- Reverse Mortgage Documents: What Do You Need?
- Is My Home Eligible for a Reverse Mortgage?
- Reverse Mortgage vs. Cash-Out Refinance: Which Is Better?
- Reverse Mortgage Insurance: What You Need To Know
- Making Reverse Mortgage Payments: How It Works
- Reverse Mortgage Payment Options
Rory Arnold contributed to the reporting of this article.
