How to Pay Off Your Reverse Mortgage Early
One of the biggest benefits of a reverse mortgage loan is that you do not have to start paying it off until a specified maturity event occurs. For home equity conversion mortgages (HECM), the most common type of reverse mortgage, maturity events include such things as the death of the borrower, moving out, or selling the home.
However, in some cases, borrowers may actually wish to begin paying off their HECM loan prior to the loan becoming due and payable. This may be because they have found some new source of retirement income, because they changed their mind about the reverse mortgage, or some other reason.
- Reverse mortgages are not typically due and payable unless a maturity event occurs, such as the death of the borrower or the sale of the property.
- However, some borrowers may wish to begin paying off a reverse mortgage loan early. This may be because they have found a new source of retirement income, they wish to move, or they simply changed their minds.
- Borrowers are free to begin paying off a reverse mortgage balance whenever they please. They can either pay it down directly or sell their home to cover the remaining balance.
- Heirs can also pay down a reverse mortgage balance directly or through the sale of the home.
Whatever the case may be, paying off a reverse mortgage loan early is possible — there are no rules that say you are not allowed to pay it off before the loan becomes due and payable. In this post, we will explain how to pay off a reverse mortgage early, and explain how this can be done.
Reasons to pay off a reverse mortgage
The primary reason why people pay off a reverse mortgage is because it has become due and payable. This occurs after a maturity event, such as:
- The passing of the borrower
- The borrower moving out of the home
- The borrower selling the home
- In some cases, such as a violation of the terms of the loan, the property may be no longer eligible for a reverse mortgage
Can you pay off a reverse mortgage early? The short answer is yes. It just depends on your financial situation. There are some cases where a borrower may wish to begin repaying the reverse mortgage prior to its due and payable dates. Here are a few situations where this might be the case.
New sources of retirement income
One of the main reasons that people take out a reverse mortgage is to use the proceeds — whether monthly payments, lump sum, or line of credit — as a way to cover retirement expenses. However, if you are able to leverage other forms of cash flow to cover your expenses, you may find that you do not need your reverse mortgage proceeds anymore.
Some of the common uses for reverse mortgage proceeds include:
- Living expenses, such as utilities, groceries, and car-related costs
- Property taxes and maintenance and upkeep of the home
- Medical costs, such as bills, insurance, medical devices, and home accessibility modifications
- Retirement leisure, such as travel, hobby supplies, or eating out
- Miscellaneous and incidental costs
Retirement expenses can add up quickly, especially for those working with a fixed income. For that reason, it’s important to consider whether paying off your reverse mortgage early (or prior to the due and payable date) is wise for your decision. However, if you do suddenly find a new, substantial source of revenue that can cover regular costs, you are always free to begin repaying the balance on your reverse mortgage at any time.
Desire to move to a new place
Another reason why a reverse mortgage borrower may wish to pay off their loan early is that they wish to move to a new location. For example, perhaps you find that after living retired in your home, you actually wish to move somewhere else — maybe a warmer climate, somewhere close to family, or simply to a place that’s smaller and easier to handle.
However, it’s important to remember that moving out of your home could violate one of the requirements for a reverse mortgage: the property must be your primary residence. Plus, of course, if you sell the property, you no longer own any equity in it. That means that if you do sell your home to move elsewhere, you will be responsible for paying off the remaining balance on your reverse mortgage loan.
Changing your mind
Some people might just change their minds about the reverse mortgage. If that’s the case, and you wish to pay off your balance, you will either be required to start making payments on the loan until it is paid off, or to sell the house and use the proceeds from the sale to pay back the reverse mortgage.
People may change their minds for various reasons: they may decide they want to move, they may have found alternative funding, or there may be some dispute among heirs that leads borrowers to no longer wish to maintain the reverse mortgage.
How can you pay off a reverse mortgage early?
If you decide that you do want to pay off your reverse mortgage early, there are a few different approaches that you can use. Another important point to remember is that you don’t necessarily have to pay off the entire reverse mortgage; in some cases, you may just want to decrease the balance so that your heirs have a smaller amount to pay off if they inherit the home and want to pay off the loan.
It’s also good to note that, if you are worried about heirs’ responsibility for reverse mortgages, HECM loans are non-recourse. This means that, even if the balance that remains on the loan is greater than the value of the home, heirs are not responsible for the difference. Heirs are only responsible for the smaller of the two: outstanding loan balance, or the value of the equity on the home. So, in many cases, they can simply sell the home to pay off the loan.
If you are interested in paying off your reverse mortgage early, you have two options.
Begin to make monthly payments before a maturation event
First, you could start to make monthly payments before a maturation event. When the loan matures, borrowers become responsible for both the balance and the interest that begins to accrue at that point. Depending on the terms of your loan, there may be a brief period before payment is required.
- Note that the limit for reverse mortgages in 2021 is $822,375 — so you won’t have to pay off more than that (not counting interest).
However, you are always free to begin paying down your loan balance prior to a maturity event. To do this, simply contact your reverse mortgage lender, and see how you can begin paying — whether by check, automatic withdrawals, or through an online portal.
Sell the home
You also have the option to pay off the loan by selling the home. Remember, due to the non-recourse nature of the loan, you owe the lesser of either the outstanding loan balance or 95% of the appraised value of the home. In many cases, this means that you can easily pay off the remaining loan balance by selling the home — and in some cases have money left over afterward.
So, if you wish to pay off the loan early, one method of doing this is to sell the home and use the proceeds from the sale to settle your reverse mortgage debt. In either case mentioned above, it’s a good idea to speak with a Reverse Mortgage Specialist or housing counselor about your options. Retirement finances can be tricky, so it’s a good idea to get all the perspective and education that you need before making any firm decisions.
Who can pay off a reverse mortgage?
Reverse mortgages can be paid off by the borrowers or the borrowers’ heirs. If a borrower wishes to pay off a reverse mortgage, they can start making payments on the balance as explained above, or they can sell the home and use the earnings from the sale to pay off the balance.
If the borrower passes away or moves out of the home and the property is inherited by heirs, then they have the opportunity to pay off the loan. They can do this either by making payments, or by selling the home and paying down the reverse mortgage balance with the earnings from the sale. Note again that heirs also owe the lower of either 95% of the appraised value of the property or the remaining balance on the loan.
On some occasions, paying off your reverse mortgage early might make sense. If you’re unsure whether paying off your reverse mortgage is the right option for your financial situation and your retirement, a GoodLife Reverse Mortgage Specialist is always ready to help. And, for more general information on reverse mortgages or the HECM process, you can always refer to our free reverse mortgage guide.