One of the biggest questions and concerns surrounding reverse mortgages — and loans in general — is what the repayment process looks like. When receiving a loan, it is essential to understand your repayment obligations, so you do not encounter any surprises for which you are unprepared. Reverse mortgages, in particular, are unique loans, as they only require you to pay the lender back in very specific situations: death of the borrower, selling the home, or no longer living in it as your primary residence. This is very beneficial for borrowers, as they are always in or near retirement, so they do not need to worry about repayment for a long time. However, it is still very important to fully understand how and when you or your heirs will need to repay the loan. In today’s blog, Family Home Loan Texas explains these circumstances and what you need to expect.
Reverse Mortgage Refresher
A reverse mortgage, which is also known as a HECM, is a unique loan that allows borrowers to turn their home equity into spendable funds. Eligibility requirements are stricter than many loans, as borrowers must be at least 62 years old and the loan must be taken out on their primary residence — a home they spend at least six months of the year in. While anyone of the appropriate age can apply for a reverse mortgage, it typically makes the most sense for borrowers who have at least 50% equity in their homes. Lenders will typically provide more money when borrowers have paid off more of their mortgage. Any money you do receive is considered non-taxable income — after all, the money is based on what you have already put into your home. A notable benefit of a HECM is that you do not have to pay any money back (including interest) until you cease living in your house.
When Payment Is Due
As mentioned, payment is due when you stop living in the house you took the reverse mortgage out on. This can happen if you pass away, sell the home, or your home is no longer your primary residence. We will get into the process of repayment of the first two situations momentarily, but the third requires more explanation. Your primary residence is the place you spend at least half of the year, so as long as you spend the majority of your time living in this home, you will not have to worry about repayment. However, if you have a reverse mortgage and purchase a vacation home and end up spending most of your time there, you will likely need to pay back the loan. This can also happen if you end up moving into an assisted living facility or move in with family for various reasons. While this doesn’t frequently occur, it is still important to keep this outcome in mind.
You could also need to repay your reverse mortgage if you default on the loan. Again, this is exceedingly rare, but it can happen if you don’t pay your property taxes or insurance or do not maintain your property to sufficient standards. Maintaining the upkeep of your home is important because whenever payment is due, the lender expects to make back the money they initially lent out. If the house falls into disrepair, they are less likely to see any return on their investment.
How To Pay Back The Reverse Mortgage
When it comes time to pay back the mortgage, there are several options. If you decide to sell the house or if you pass away and your heirs do not want to keep it, you can use the funds from the sale to repay the loan. If you sell it and there are additional proceeds after satisfying the loan, you or your heirs can keep the money. If this isn’t the case, you will only have to repay the original amount of the loan or 95% of the home’s appraised value — whichever is less. This is a helpful protection, as borrowers will never have to pay back an unreasonable amount of money.
If you want to move out but keep the home, you could also refinance the reverse mortgage to turn it into a traditional mortgage. This isn’t quite as common, but it is important to keep in mind that you will have to start making monthly mortgage payments again. If you pass away and your heirs want to keep the home, they could pay the HECM back outright or take out a new mortgage on the home and use it to pay off the remaining balance of the reverse mortgage.
Finally, if you or your heirs cannot meet the repayment requirement (and don’t want to face foreclosure), you can provide your lender with the deed. This process is known as a deed in lieu of foreclosure.
Overall, repayment is quite straightforward, as most borrowers choose to live the remainder of their lives in the home on which they received the reverse mortgage. In these cases, they won’t have to worry about paying it back. When you begin the reverse mortgage process, you will meet with a HUD-sponsored counselor who will explain all of this to you in further detail. This is to ensure there will not be any surprises with your loan.
Contact Us To Learn More About Reverse Mortgage Repayment
Family Home Loan Texas was founded by loan originator and long-time mortgage professional Rob Bramer. Rob has helped clients secure the loans they need both locally and nationally and can help you get the loan you need to live life on your terms. Call 1-800-990-LEND (5363) to speak with Rob about a reverse mortgage loan and to receive a free, no-commitment consultation.