A reverse mortgage is like many financial decisions – there are positives and negatives.
If you have watched any cable television, then surely you have seen Tom Selleck as the spokesman for a reverse mortgage company.
Run a search on the internet for “Tom Selleck reverse mortgage,” and you may think he has committed a shameful crime by some search results.
No, reverse mortgages are regarded as annuities are in the investment world.
You will find very few people who do not have an opinion about them, positive or negative.
If you know what a “mortgage” is, what exactly is a reverse mortgage?
Home equity conversion mortgages (HECMs) are the most common type of reverse mortgage and are available to homeowners 62 and older.
Rather than the borrower making monthly payments as with a mortgage, the borrower receives monthly payments from their mortgage lender.
Put another way; it is an arrangement with a third-party lender that lets seniors borrow against their home equity.
A recent Yahoo Finance article asks a fundamental question: “How do you pay back a reverse mortgage?”
The article notes that the mortgage lender makes monthly payments to you, so the lender can have your home after you pass away.
However, reverse mortgage borrowers or their heirs can also repay the debt and keep the home.
Know that a reverse mortgage must be repaid in full if the last surviving borrower or eligible non-borrowing spouse passes away, sells the home, or no longer lives in the home as their primary residence.
That last trigger for repayment can happen if the borrower enters an assisted living facility, moves in with family, or downsizes.
Nevertheless, there are other situations when the loan could need to be repaid sooner.
For example, if the borrower stops paying homeowners insurance or property taxes on the home or maintaining the home (and it falls into disrepair).
Some ways to pay back a reverse mortgage early or when it comes due include:
Sell the home. When payment comes due, the borrower or their heirs can sell the home to pay off the loan. The sale proceeds go first toward paying off the lender, and the borrower or their estate keeps any equity left over.
Refinance the mortgage. Say you are the borrower and want to move out but still keep the home. Refinance your reverse mortgage into a traditional mortgage loan.
Take out a new mortgage. If the borrower’s heirs want to keep the home, they can take out a new mortgage to pay off the reverse mortgage balance.
Provide a deed in lieu of foreclosure. The borrower or their heirs can give the home deed to the lender. This is a “deed in lieu of foreclosure” because it is usually the last resort before allowing the lender to foreclose on the home.
If the last surviving borrower or eligible non-borrowing spouse on a reverse mortgage loan dies, the estate and heirs must repay the debt.
As with all things financial – look before you leap.
Before signing on the dotted line for a reverse mortgage, explore other options and get input from your family and professional advisors.
Reference: Yahoo Finance (June 19, 2023) “How do you pay back a reverse mortgage?“