How to Get Out of a Reverse Mortgage
At the time you took it out, a reverse mortgage seemed like the best way to fund your financial goals. But perhaps circumstances have shifted or you’ve changed your mind. It’s not too late to back up (and out) before or after you sign your reverse mortgage paperwork. Regardless of what stage you’re in, yes, you can get out of a reverse mortgage.
How a Reverse Mortgage Works
Before we get into the different ways you can exit a reverse mortgage loan, let’s review how these types of loans work. In a reverse mortgage, the lender is paying the homeowner in exchange for the equity in the home. In other words, the borrower receives payments from the lender (usually monthly) and does not need to make payments back to the lender as long as he or she lives in the home. As time goes on, the loan balance and interest grow, while home equity decreases.
There are many reasons why you may change your mind about this option: You’ll need to pay back the reverse mortgage loan if you’re out of your home for twelve months or more (even if it’s an unexpected stint in a nursing home), and the fees are typically greater than a standard mortgage.
Read more about the disadvantages of a reverse mortgage >>
So you’ve decided this wasn’t the best financing option for your needs. There’s good news.
How to Get Out of a Reverse Mortgage
Scenario 1: You haven’t signed.
There’s a time and a place to trust your gut. This is one of them. There are two important questions you should consider (or reconsider) when you’re thinking about backing out of a reverse mortgage.
- Is a reverse mortgage really the best fit for your financial needs? Pinpoint why you’re making this decision in the first place and research other ways to overcome your financial challenge. For example, if paying off debt is your motivation, look into low-interest personal loans, home equity loans and home equity investments.
- Can you keep up with your home’s maintenance? Letting home maintenance slide is not an option once you’ve signed up for a reverse mortgage. Although reverse mortgages don’t require monthly payments, this loan does require homeowners to meet other requirements, such as paying property taxes and insurance and keeping up with maintenance. Forgoing these expenses could result in a foreclosure.
Scenario 2: The ink isn’t dry yet on your signature.
Nothing is final with a “cooling-off” period clause. Otherwise known as the right of rescission, this exit option gives homeowners three business days after signing the paperwork to reconsider without penalty, no questions asked. Make sure you didn’t inadvertently waive your right of rescission. In certain circumstances, such as if the property is in foreclosure, homeowners opt to waive their right to rescission to speed up the paperwork.
To opt out, put pen to paper. Your lender must receive your decision in writing within the permitted three days. Once the cancellation is set in motion, your lender must terminate the loan and return fees, closing costs, and any unused funds within 20 days.
It’s important to note that the three-day rescission doesn’t apply to a Home Equity Conversion Mortgage (HECM) for Purchase. This type of reverse mortgage, available to those 62 and older, allows homeowners to use the funds from a reverse mortgage to purchase a new home. Unfortunately, once you’ve signed the documents on a HECM for Purchase, the transaction is final.
Scenario 3: It’s a done deal—or is it?
After all is said and done, you still have options to back out of a reverse mortgage.
The most expedient course of action is to repay the balance in full. The good news is reverse mortgages don’t typically have prepayment penalties. The not-so-good news is if you pay the loan back ASAP, you miss out on having that extra cash on hand.
How to Buy Out of a Reverse Mortgage
Paying off a reverse mortgage in order to get out of it is possible. There are at least four reliable ways to extricate you from this situation.
- Sell: If a large lump sum isn’t sitting in your bank account, consider selling your home. Talk with your reverse mortgage lender and ensure you know the full payoff amount. You can ask them to put this amount in writing. Use the proceeds from the sale of your home for the reverse mortgage payoff. Ensure the loan is paid off in full and that your account is closed. You can use the remaining equity to put a down payment on a new house. Reconsider this option if the sale of your home won’t cover the cost of the reverse mortgage.
- Refinance: Refinancing is a good option if you’ve already made a dent in your reverse mortgage debt but monthly payments have set you back. Talk with your lender about your options; you may find you can rework the terms of your reverse mortgage so they work better for your current financial situation.
- Take Out a New Loan: You can take out a conventional mortgage or another type of loan, like a personal loan, to pay off your reverse mortgage. You may find a new loan offers more favorable terms or monthly payments (or both). How much money you need to pay off your reverse mortgage will dictate what type of loan makes most sense. Talk to your lender about your options.
- Consider a Home Equity Investment: If monthly payments and interest don’t entice you, home equity investment products like Hometap may be a smart solution. This option enables you to tap into your home’s equity to pay off your reverse mortgage. In exchange, an investor gets a share of your home’s future appreciation. Best of all, you can stay in your home.
Do What’s Right for You
Homeowners have the right and resources to change their minds. Exercise yours if that reverse mortgage—or lender—seems too good to be true. No matter what stage you’re at, there are options to get out of a reverse mortgage get your financial situation back on a track that works for you.
While you can always talk with your lender about your options, you may also find it’s worth consulting an unbiased financial advisor who can listen to your needs and provide a course of action tailored to your current situation and end goal. You may find the upfront cost saves you money in the long run and prevents you from taking a financial misstep.
Take our 5-minute quiz to see if a home equity investment is a good fit for you and your financial goals – access your equity with no monthly payments and no interest.
You should know
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.