Reversing Course From a Reverse Mortgage
At the time you took it out, a reverse mortgage seemed like the perfect 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.
Here’s how to get out of a reverse mortgage in three common scenarios.
Scenario 1: You haven’t signed.
There’s a time and a place to trust your gut’s nagging doubts. This is one of them. There are two important questions you should consider (or reconsider).
- 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 and home equity loans.
- Can you keep up with your home’s upkeep? 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 exit 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 do you know if you can even repay the loan? 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 to pay off the loan. 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 exit a bad deal and 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.
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The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.