How to Get Out of a Reverse Mortgage
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Getting a reverse mortgage isn’t something you do on a whim. Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgages, require all borrowers to receive counseling from an HUD-approved counselor who will explain reverse mortgage options, the costs and potential consequences involved, and help determine whether other alternatives might be a better option for you.
However, even a borrower who does the research and receives counseling sometimes changes their mind and find themselves asking, “Can I get out of a reverse mortgage?”
When it makes sense to get out of your reverse mortgage
There are a number of reasons you might want to get out of your reverse mortgage.
You may not be physically able to live in your current home. Reverse mortgage borrowers have an obligation to occupy the property as their primary residence. Short absences for illness are allowed, but lenders require the borrower to certify, on an annual basis, that they are occupying the property.
If you reach a point where you need a home that is easier to access or navigate — for example moving from a two-story house to a single-story — you might wish to cancel your reverse mortgage.
You may have relatives who want to keep the house after you pass away. A reverse mortgage becomes due when the last surviving borrower or remaining eligible non-borrowing spouse passes away, moves out or sell the home. At that time, the borrower or their heirs can either sell the home and repay the loan balance with proceeds from the sale, or use personal funds to satisfy the debt.
If you want your heirs to keep the home long term after you pass away, you’ll need to consider how they’ll repay the reverse mortgage without selling the home. That consideration could lead you to opt out of the reverse mortgage before that time comes.
Finally, you might simply decide that the terms of the reverse mortgage are not right for you or find you can get a better deal elsewhere.
How to get out of a reverse mortgage
If you’ve decided you want out of your reverse mortgage, you have a few options besides dying or selling the home. The right choice for you depends on how long ago you took out the loan and your overall financial situation.
Change your mind within 3 days
Did you start having regrets before the ink was even dry on your reverse mortgage loan? If you act fast, you can take advantage of the “right of rescission” period.
“The right of rescission is a consumer protection that allows the borrower to change their mind for any reason, without penalty, up to three days after signing the loan agreement,” explained Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA). “Borrowers learn about this option early in the loan process during the required counseling session that takes place prior to completing the loan application. They’re reminded of their right of rescission during the loan closing as well.”
Repay the reverse mortgage
If you’re past the right of rescission period, getting out of your reverse mortgage won’t be quite as easy, but it is possible.
“A borrower who wishes to repay their reverse mortgage loan may do so without penalty at any time,” said Irwin. “They are only responsible for repaying the balance of the loan, which is the amount borrowed plus interest.”
To illustrate, Irwin provided an example:
A borrower had an initial principal limit of $305,000, which they elected to take as a combination of a $100,000 line of credit and a tenure payment of $1,100 each month. After 12 months, they received $13,200 in monthly payments and did not draw on their line of credit. If at that point, they decide to repay the loan, they will need to repay $13,200 plus any closing costs that were financed, plus interest.
Of course, the complicated part is repaying the loan. How you pay it off will depend on your circumstances. Here are a few options you might consider.
Take out a conventional mortgage
If you can afford to live without the additional income provided by the reverse mortgage and start making a monthly mortgage payment, you can take out a conventional mortgage to repay the reverse mortgage.
If you took out the reversed mortgage because you needed additional income to cover your monthly mortgage expenses or pay for home repairs, this option might not be feasible without financial assistance from another source.
However, when you consider reverse mortgages charge both interest and ongoing mortgage premiums, they are usually more expensive than a traditional home loan. So refinancing to a conventional mortgage may work out in your favor.
Tap your savings
If you have the assets in your retirement savings, you may be able to use some of your savings to pay off the reverse mortgage. This will leave you with less principal on which you’re earning investment income, but it may be a smart move if the interest you’re paying on the reverse mortgage exceeds what you’re able to make on your investments.
Before you consider this option, run the numbers to make sure you’ll still have enough savings to live on during retirement.
Get another reverse mortgage
Do you want out of your reverse mortgage because you’ve realized you can get a better deal elsewhere? You may be able to refinance your existing reverse mortgage into a new reverse mortgage with a lower interest rate.
“A borrower who wants to repay their loan balance should contact their loan servicer,” Irwin said. “If the home has increased in value, they may consider speaking with a lender to discuss whether it would be beneficial to refinance into a new reverse mortgage that could provide additional loan proceeds.”
The risks of ending your reverse mortgage
Keep in mind, any course of action you take will come at a cost. Refinancing your existing loan with either a conventional mortgage or a new reverse mortgage will entail closing costs.
All HECMs charge an upfront Mortgage Insurance Premium (MIP) at closing that equals 2 percent of the home’s appraised value or of the FHA lending limit ($679,650), whichever is less. That MIP is considered “fully earned” at the loan closing, so even if you repay your loan, your lender will not refund any portion of that upfront MIP. However, you will get to avoid future annual MIP charges of 0.5 percent of the outstanding balance, that are normally added to your loan balance each year.
What to do if you’re stuck
If you’ve considered all of your options for getting out of a reverse mortgage and found all of them lacking, Irwin recommends seeking advice from a reverse mortgage counselor.
“Borrowers with concerns about their reverse mortgage loan should speak with their reverse mortgage counselor. In addition to discussing the loan repayment process, the counselor can also run a benefits checkup to determine if the borrower is eligible for federal or state resources, such as SNAP or other government programs,” Irwin said.
Even if you can’t afford to repay your reverse mortgage in a lump sum, you might consider making partial prepayments to reduce the amount owed later on. Most reverse mortgages allow partial prepayments without charging a penalty but be sure to talk to your loan servicer about your prepayment options and confirm how those payments will be applied. Different reverse mortgages products have their own methods for applying partial prepayments.
If you’re second-guessing your decision to take out a reverse mortgage, it is possible to get out of it. However, unless you have the means to repay the amount you’ve borrowed, your options will be limited. If you have heirs who want to keep the home after you pass away, they may be able to provide financial assistance now in order to keep the property in the family long term. Talk to a reverse mortgage counselor and your loan servicer about your options. They should be able to give you a better idea of which repayment options will be the most beneficial in your financial situation.