A reverse mortgage lets qualified older homeowners turn their home equity into cash that they can use in their later years. However, like any other loan, a reverse mortgage eventually needs to be repaid.
But can you pay back a reverse mortgage early? Yes, you can. While payments aren’t required for as long as you live in the home, there are benefits to paying off a reverse mortgage early.
Here’s what you need to know about how to pay off a reverse mortgage early:
- What Is a Reverse Mortgage?
- Can You Pay Off a Reverse Mortgage Early?
- How Do You Pay Off a Reverse Mortgage?
- How Can Family Members Take Over a Property With a Reverse Mortgage?
- FAQ: Prepaying a Reverse Mortgage
- The Bottom Line on How To Pay Off a Reverse Mortgage Early
What Is a Reverse Mortgage?
A reverse mortgage is a loan for older homeowners to access their equity in the form of a line of credit, a series of regular payments, or a combination of the two.
The primary benefit of a reverse mortgage is that it doesn’t require monthly payments like a traditional loan. Instead of you paying the lender and increasing your equity, the lender pays you and your equity decreases. Once the borrower no longer lives in the home, the loan is repaid, typically using the proceeds from selling the house.
There are three primary types of reverse mortgages:
- Home equity conversion mortgages are insured by the Federal Housing Administration, and are by far the most common type.
- Proprietary reverse mortgages are offered by individual lenders, and have different rules and regulations.
- Single-purpose reverse mortgages are offered by certain government agencies and nonprofit groups, mostly to lower- and middle-income homeowners.
Can You Pay Off a Reverse Mortgage Early?
While you don’t have to pay off a reverse mortgage until you no longer live in the home, you can make payments ahead of schedule to reduce how much you owe when the loan comes due.
When do you need to pay back a reverse mortgage?
A reverse mortgage comes due when you no longer live in the home securing the loan as your primary residence. This can happen if you move to another home or a health care facility, if you choose to sell your home, or if you and any co-borrowers or eligible spouses die.
Benefits of paying a reverse mortgage early
There are many benefits to paying off a reverse mortgage early. One important benefit has to do with interest.
Over time, the balance on your reverse mortgage grows, even if you don’t take additional money from the loan. This is because the lender charges interest on the outstanding balance. If you make payments that reduce the balance, less interest will accrue.
“The main advantage of paying off a reverse mortgage early is the flexibility you get when it comes to your retirement plans,” says Robert Scott, owner of Sell Land, a St. Louis-based homebuying company. “If you pay off your reverse mortgage early, you are freer to sell the house or move to another location since the remaining amount you still have to pay will considerably be less. It also prevents passing the burden to your loved ones in case you pass away without paying off the reverse mortgage.”
Reasons to wait to pay off a reverse mortgage
One of the primary benefits of a reverse mortgage is that monthly payments aren’t required. You turn home equity into cash and don’t have to worry about a monthly payment like you would with a home equity loan or line of credit.
If payments aren’t required, then making payments is taking money out of your pocket. You might be saving money in the long run, but these loans are typically used by older homeowners who might be less concerned about the long term.
This is especially true if you have no heirs who you want to inherit the home. In that case, you can simply let the lender take your home when you move out or die, and never worry about making any payments on the loan.
Paying off a reverse mortgage is rarely a good idea, says Martin Orefice, CEO of Rent To Own Labs, a real estate company based in Orlando, Florida.
“Reverse mortgages work best as ways to access the equity in your home in advance of selling it,” he says. “Paying them off is usually not the best use of your money, and isn’t usually doable unless you’ve come across a new source of income.”
How Do You Pay Off a Reverse Mortgage?
If you’ve decided to pay off your reverse mortgage early, there are a few ways that you can do it.
Make regular payments
Perhaps the simplest option is to treat it like a home equity loan or line of credit. Make regular, monthly payments toward the balance, and eventually you’ll pay it off.
Consider this example: You’ve received a reverse mortgage and taken out $50,000 from it. The loan’s interest rate is 5%. If you choose not to make any payments, the loan’s balance will be $82,350 in 10 years. If you try repaying the loan during those 10 years, you’ll pay $530 per month. After 10 years, you’ll have repaid the loan and only paid $63,639 — meaning $18,711 less interest accrued on the loan.
Because payments aren’t required, you can always stop making payments if your situation changes, but you’ll still benefit from some interest savings.
Make a lump-sum payment
If you find yourself with a one-time windfall, you could use some of that money to pay off a portion of your reverse mortgage.
Continuing with the previous example of a $50,000 loan at a 5% interest rate, let’s say you decide to make a $25,000 payment five years after getting the loan. When you make the payment, the loan’s balance will be $64,168, so the payment will reduce that amount to $39,168. Five years later, the balance will have grown to $50,267.
Without the $25,000 payment, you would have had a balance of $82,350 after 10 years — meaning the lump-sum payment helps you save $7,083 in interest.
Stop receiving payments or making withdrawals
One way to reduce the speed at which your debt grows — but not actually repay the loan — is to stop taking money out.
Two common ways to get money from a reverse mortgage are to use it as a line of credit or to receive regular payments. If you stop taking payments, the balance will grow more slowly.
For example, let’s say you sign up for a reverse mortgage that gives you $400 every month. Assume the loan’s initial balance is $5,000 after fees and mortgage insurance, and that the loan’s interest rate is 5%. After 20 years, you’ll owe $178,662 on the loan.
If, 10 years in, you decide to stop taking payments from the loan, your balance at that point will be $70,607. After that, the only thing adding to the loan’s balance will be interest. In another 10 years, the balance of the loan will be $116,290 — which is $62,372 less than if you had continued taking payments from the reverse mortgage.
Refinance to a traditional mortgage
If qualified, you can refinance a reverse mortgage into a traditional mortgage to pay it off. Your new loan will provide the money for a reverse mortgage payoff, and your lender will start sending you monthly bills to pay off that loan. As you make payments on the traditional mortgage, the balance will decrease until it’s paid off.
Sell the house
If you want to sell your home, you’re allowed to do so even if there’s a reverse mortgage in place. However, you’ll need to use the proceeds of the sale to repay your reverse mortgage.
One benefit of HECMs is that they are nonrecourse loans. This means that even if the sale price isn’t enough to fully repay your debt, the lender cannot pursue you for the rest of the money. The FHA will reimburse the lender for the remaining amount.
Deed in lieu of foreclosure
If you’re worried about foreclosure, you can choose an arrangement involving a deed in lieu of foreclosure. If you go with this route, you’ll give the lender the deed to your home, and the loan will be considered paid in full. This lets you avoid having to make cash payments or deal with foreclosure.
How Can Family Members Take Over a Property With a Reverse Mortgage?
When the person taking out a reverse mortgage dies or moves out of their home, the reverse mortgage must be repaid. Often, this is done by selling the home or turning it over to the lender.
If family members want to take over a property with a reverse mortgage, they need to first repay the balance. Options include making a lump-sum payment, or refinancing the loan. They must pay the lesser of the outstanding balance or 95% of the home’s appraised value to keep the home.
FAQ: Prepaying a Reverse Mortgage
Learn the answers to a couple of frequently asked questions about prepaying a reverse mortgage.
Heirs have 30 days from receiving the due and payable notice from the lender to satisfy the debt by paying it back, selling the home, or turning over the deed.
However, heirs can receive an extension of up to one year to obtain financing to purchase the home.
No, reverse mortgages do not have prepayment penalties.
The Bottom Line on How To Pay Off a Reverse Mortgage Early
Paying off a reverse mortgage early can give you and your heirs more freedom in how to use the home. It also reduces the amount of interest that will accrue. However, reverse mortgages don’t require payments, so if you’re unconcerned about what happens to your home when you move out, making payments might not be the right choice for you.
