If you’re considering a Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage, by now you’ve probably become familiar with one of the top advantages of the loan – optional monthly mortgage payments1. And no, it’s not too good to be true. Tapping into your equity with a reverse mortgage provides you with an additional source of cash flow to fund what matters most in your retirement years – with the freedom to pay as little or as much as you want, as often as you’d like.
With this in mind, you may find yourself wondering: “Without a reverse mortgage payment, when and how do I repay a reverse mortgage loan?” Great question!
Like any other type of loan, a reverse mortgage must eventually be repaid. The good news? As long as you fulfill your obligations as the homeowner, you do not have to pay the loan until after it becomes deemed “due and payable” via one of the following circumstances:
- All borrowers permanently move out of the home
- The last surviving borrower passes away, sells the home, or doesn’t live in the home for 12 consecutive months
- You fail to pay property taxes or homeowners insurance
- You let the property deteriorate beyond what is considered reasonable wear and tear without correcting the problem
So now that we covered when the loan must be repaid, you’re likely thinking ahead…
How can a reverse mortgage loan be repaid?
When it comes to paying off a reverse mortgage, you (or your heirs) can decide how the loan balance – including any fees and accrued interest – is repaid. Should you leave the home to your heirs, they assume responsibility for the full loan balance – regardless of whether or not they intend to occupy the home. Fortunately, there are multiple options for repaying the loan. You or your heirs can:
Sell the home and keep any remaining funds
When a reverse mortgage becomes due, many homeowners (or their heirs) opt to sell the house and use the proceeds from the sale of the home to repay the reverse mortgage loan. This is an especially popular option for heirs who are lacking the funds needed to pay off the loan. In this situation, any additional funds from the sale, in turn, go to your heirs.
Repay the loan and keep the home
If you or your heirs wish to keep the home instead of selling it, the reverse mortgage loan must be paid off with another source of funds. In this case, you or your heirs arrange for another method of financing, pay off the loan, and keep the house in the family. And in the event the loan becomes due and payable, your estate can either refinance the reverse mortgage as a standard ‘forward’ mortgage or pay the lesser of the loan balance or 95% of the home’s appraised value.
Do nothing and deed the home to the lender
If the balance on the home exceeds the home’s value, you or your heirs may opt to deed the home to the lender. Since reverse mortgages are non-recourse loans, you or your heirs will never owe the lender more than the home’s current market value at the time of its sale.
“But what if I owe more than my house is worth?”
Not to worry – this cannot happen. In the event that the loan balance is greater than the home’s appraised value, the excess amount is covered by federal mortgage insurance – the Mortgage Insurance Premium (MIP) you paid over the life of the loan.
What happens if there are co-borrowers on the loan?
Any names that are listed on your home’s deed (for instance, yourself and your spouse) will also be listed as co-borrowers on a reverse mortgage loan. Should a co-borrower pass away, this does not force repayment of the loan. The surviving borrower can continue to own and live in the home – while enjoying all the benefits of the reverse mortgage.
When considering a reverse mortgage, it’s important to have the right conversations with the right people. And if you plan on leaving your home to your children, it’s important to talk to them about potential repayment options.
At Longbridge Financial, we are here to help. We’ll get to know you and your family, and take the time to understand your situation, so we can offer solutions that are best tailored to your needs. We’re committed to doing the right thing – which is why we put our list of promises in writing.
We’ve helped countless seniors transform their retirement financial situation with reverse mortgages – isn’t it time we help you do the same?
1 As with any mortgage, the borrower must keep current with property taxes, insurance, and maintenance.