Because reverse mortgages are seen as a strategy for being able to afford to stay in your home through retirement, they are often viewed as something of a one-way deal. However, that should not imply that you have to live with a reverse mortgage for the rest of your life – there are ways to get out of them short of dying. In fact, before you get into one in the first place, it may be helpful to know how to get out of a reverse mortgage in case your circumstances change.
Why You May Want to Get Out of a Reverse Mortgage
There are several reasons why you may not want to live with a reverse mortgage for the rest of your life. For one thing, you may reach a point where it is physically impossible for you to stay in your current home. A living arrangement involving easier access and more personal care might be necessary.
You might also have younger relatives who are interested in owning the house long-term. Especially if they can help take on some of the financial responsibility for the property, you may want to cancel the commitment to transfer the home to the reverse mortgage lender. Finally, you might simply decide that the financial terms of the reverse mortgage no longer suit you, and that there are more favorable terms available.
How to Get Out of a Reverse Mortgage
For the above reasons and possibly others, here is how to get out of a reverse mortgage if you need to:
- Sell your home to pay off the reverse mortgage. A reverse mortgage provides you with cash in exchange for equity in your home, but you are charged interest on that cash until the home is sold to pay off the loan. This happens automatically when the borrower dies, but if you decide you are not going to be able to stay in the home long-term, you may want to sell the house to eliminate those interest payments and to cash in any remaining equity. This makes the most sense if you still have a substantial amount of equity left beyond what you owe on the reverse mortgage. If you do not have any equity left, paying off the reverse mortgage won't leave you with anything left over.
- Take out a conventional mortgage to repay the reverse mortgage. In effect, this entails borrowing to repurchase the equity you have given up via the reverse mortgage arrangement. Since conventional mortgage rates are typically lower than reverse mortgage rates, this can work to your advantage in the long run. In the meantime though, you have to be able to both live without the regular income from the reverse mortgage, and be able to make the monthly payment on your new mortgage.
- Dip into savings to pay off the reverse mortgage. If your plans have changed and you either want to preserve the equity in your home for your heirs or yourself, one option is to use some of your retirement savings to pay off the reverse mortgage. This will leave you with less to invest, but you may come out ahead in the long run if the interest on the reverse mortgage exceeds what you would have been able to earn on those investments. The key, though, is that your remaining investments must still be able to provide you enough money to live on.
- Refinance to a more attractive reverse mortgage. Reverse mortgages can pay you cash periodically or all at once, and if you can find a substantially lower interest rate, it may be worth your while to use a new reverse mortgage to pay off the old one. Just be sure to factor any repayment penalties and refinance closing costs into your calculation. This probably does not make much sense if your current reverse mortgage balance already exceeds the value of your home, because since you don't have to repay more than the value of your home, any additional interest charges are a moot point from then on.
Just remember that there is generally going to be a cost to any transaction, whether it is initiating a reverse mortgage, selling your home, or refinancing. So, just because you can get out of a reverse mortgage if need be, you still should not enter into one lightly. If there is a good chance you may need to get out of it in the near future, the cost of getting in and getting out may not be worthwhile.