There are no prepayment penalties when you pay off a reverse mortgage early. Paying back a reverse mortgage early is favorable in many scenarios. You can leave the home to your heirs clear and free, with no or a much smaller debt than occurred in the beginning.
A reverse mortgage can be a great way to opens in a new windowpay off debt or opens in a new windowfund retirement. But how do you know how much money you need? And how do you pay it off early? Here is a step-by-step guide for paying off your reverse mortgage early!
One way to pay off a reverse mortgage early is to refinance it into a more conventional loan or to pay the difference between the amount of the reverse mortgage and the current value of the home. Paying back the loan on a monthly basis also reduces the length of time the borrower must wait to qualify for a HECM.
Key Takeaways
- You can get out of a reverse mortgage using the following two: The Right Of Rescission and HECM For Purchase.
- Reverse mortgage heirs are not responsible to pay the loan balance or pay back the loan.
- Alternatively, heirs may walk away without any negative effect on their credit histories or sign a Deed-in-Lieu of opens in a new windowForeclosure to satisfy the loan.
How A Reverse Mortgage Also Can Be Paid Off Early
The process of paying off a reverse mortgage is not very complicated. But it is advised that you contact a reverse mortgage specialist to avoid potential issues.
Step 1: Choose a date to pay off your reverse mortgage. Request your lender “no further draws” against the credit line of the equity and a payoff statement that includes the month when the mortgage is to be paid off.
The payoff statement lists all payments made over the course of the mortgage, accumulated interest, and costs associated with borrowing the loan.
Step 2: The statement may also include 34 days of interest, which provides padding if the payment is posted after the first of the month.
Since a reverse mortgage is backed by the Federal Housing Authority, the posting takes place on the first business day of the month, and a weekend could push it to the third day of the month.
Step 3: If you are selling the home, you may claim reimbursement if you had prepaid the insurance for an entire year. So let your insurance agent know the expected payoff day.
Step 4: It is worth letting your title closing agent handle the mortgage paperwork and the lien releases on your behalf. The process requires release for the lender and the FHA for the mortgage insurance premium.
On the other hand, if you handle the payoff on your own, send a cashier check for the money through overnight mail or wire transfer to the lender’s bank. Follow up to make sure that the lender has received the funds.
Step 5: Contact the title company agent to know if you need to fill out a form to receive a prorated rebate of mortgage insurance premiums. Also, request any “set aside” fees if any.
What is a reverse mortgage in simple terms?
A reverse mortgage is a loan available to homeowners 62 or older that uses the equity in your home as collateral. The loan does not have to be repaid until the last surviving borrower dies, sells, or moves out of the house.
How Does Reverse Mortgage Work?
As a mortgage progresses, home equity increases as the loan balance decreases. As homeowners take out reverse mortgages or the equity of their homes decreases, they owe more and more to the lender.
The homeowner gets to choose which payments they prefer and only pays interest on the money used. If the homeowner moves or passes away, any money gained from selling the home pays back to the lender who provides a reverse mortgage.
What about appraised value?
In some cases, the appraised value can exceed what a homeowner owes. In that case, how do you pay off a reverse mortgage early?
Before paying off your reverse mortgage, talk to your agent about how much equity you have in your home and how much money would be received from selling it.
Changing Your Current Plan
Talk to your lender about changing the way you pay for your reverse mortgage. You can change your payment plan, as long as you didn’t use a fixed-rate, one-time lump sum.
Changing your payment plan is easier than refinancing, and will typically only require a small administrative fee. The most common question is whether you are already close to reaching the principal limit of your loan. Adjusting your payment plan is the easiest way to pay off a reverse mortgage early.
Problems with Reverse Mortgage
Even if you make a plan to pay off your reverse mortgage early, things may not go as smoothly as you expect. Life changes, such as illness, can make it difficult to keep up with required living expenses. In some cases, the value of your home may decrease, or you may no longer reside in your home as your primary residence.
Reverse mortgages are not for everyone. Be sure to do your research and consult with a reverse mortgage specialist to ensure that this type of loan is right for you.
Can I Get Out Of A Reverse Mortgage?
The great news is yes! You can get out of a reverse mortgage using the following two options:
The Right Of Rescission
Most reverse mortgages come with “the right of rescission.” With this cancellation right, borrowers have three business days after signing their reverse mortgage closing paperwork if they want to cancel the transaction with no penalty. The lender cancels all mortgage documents and returns all fees, closing costs, and unused funds within 20 days.
HECM For Purchase
HECMs or Home Equity Conversion Mortgages for purchase allow you to purchase a new home and obtain a reverse mortgage in one transaction. However, once closing documents are signed, and you have received proceeds, the decision is final.
Reverse Mortgage Heir’s Responsibility
Reverse mortgage heirs are not responsible to pay the loan balance or pay back the loan. If the loan balance is more than the appraised value of the home, the heirs are not held responsible to pay the difference or making the monthly payments.
This is because a reverse mortgage is a non-recourse loan and the FHA insurance absorbs the loan balance. The borrower pays this insurance during the loan closing as well as each month.
When the borrower dies, the heirs can keep the home by financing the HECM loan. They may sell the home and keep the remaining proceeds that don’t go toward the reverse mortgage loan repayment. Alternatively, heirs may walk away without any negative effect on their credit histories or sign a Deed-in-Lieu of opens in a new windowForeclosure to satisfy the loan.
Heirs are advised to process a reverse mortgage loan quickly after it becomes due. Selling your home can be done if the heirs are unable to use the property.
A reverse mortgage can be paid off early by refinancing it with a traditional loan or paying the difference between how much was borrowed and how much is owed on the home.
The borrower may also make monthly payments, which will shorten how long they have left in their life before getting a HECM.
Consumer financial protection bureau (CFPB)
Requires any lender providing a reverse mortgage to be federally regulated, in good standing, and comply with state laws.
The CFPB also requires the lender or servicer of your loan to give you an annual statement disclosing how much equity is available on your home. This information will show how long it could take for you to pay off the debt.
Can A Reverse Mortgage Be Refinanced?
There are many good reasons why many homeowners choose to opens in a new windowrefinance their reverse mortgages.
Increased Home Equity
When you notice an increase in the value of your revere mortgaged home, refinancing allows you to tap into the additional home equity with the jumbo reverse mortgage program. This program allows for home values to be more than the FHA lending limit of $726,525. You can receive the proceeds as a lump sum cash-out payment and/or a line of credit.
Lower Interest Rate
Reverse mortgage refinancing can lead to lowered current loan interest rate.
Also, the ongoing mortgage insurance premium, which was recently lowered from 1.25% to .50%, can also be beneficial and a good reason to refinance your reverse mortgage.
Paying Off Reverse Mortgage Early FAQs
Is there a prepayment penalty on reverse mortgages?
The answer is: There are no prepayment penalties on reverse mortgages. In most cases, there’s a contract of up to ten years that allows you and other homeowners to pay off the loan balance at any time without penalty. This also means that your home equity can increase over time as property values change in your neighborhood or market conditions improve.
How do you pay back a reverse mortgage?
The most popular strategy of repayment is selling the property, after which funds from the sale are used to pay off the reverse mortgage in full. You or your heirs would usually assume responsibility for the transaction and any remaining equity in the home following completion of the reverse mortgage loan.
What happens if you don’t pay back a reverse mortgage?
In general, if you don’t make payments, the lender can start foreclosure proceedings on your property.
If they do foreclose on your home, how much of a loss will I suffer?
As with any type of opens in a new windowforeclosure, not all parts of this process are known in advance and it may be hard to predict how losses might occur.
Can you do a reverse mortgage loan if your house is paid off?
Whether you have an existing mortgage or own your home free and clear, keep in mind that a HECM (home equity conversion mortgage) reverse mortgage borrower can access 60% of the reverse mortgage proceeds in the first year; After the mortgage is paid off, they can do whatever they want with the additional proceeds.
Is there a prepayment penalty on reverse mortgages?
No. There is no prepayment penalty charged to reverse mortgage borrowers who want to repay the loan early. It is a good idea to contact your lender for how to make a one-time lump sum payment, as they will be able to give you the most accurate information about how to do this.
Can You Negotiate A Reverse Mortgage Payoff?
You might be able to negotiate with your lender to pay off the loan early and avoid foreclosure. Be sure to get everything in writing, including any verbal agreements.
What is the downside of a reverse mortgage?
The opens in a new windowdownside of a HECM reverse mortgage is that it can delay retirement planning. For example, if you use the money to supplement your income and pay off debt or buy a vacation home instead of saving for retirement, then drawing on equity from your home could negatively impact how much you have in savings when you retire.
Therefore, if you decide to get a reverse mortgage, you should be prepared to take the long view and be willing to forgo some of your short-term goals. An experienced professional should be able to help you make this decision.
What about Property Taxes?
If you have a reverse mortgage, property taxes are your responsibility. As in a forward mortgage, property taxes are assessed annually and collected by your municipal government. Property taxes are typically billed as part of your monthly mortgage statement.
Is Buying Out a Reverse Mortgage possible?
In some cases, you may want to buy out your reverse mortgage. This could happen if you come into a large sum of money or if property values in your area have increased significantly.
When you buy out a reverse mortgage, you’ll need to pay the full loan balance plus any interest and fees that have accrued. With a reverse mortgage, there is no prepayment penalty like in a forward mortgage.
Conclusion
If you are in the market for a reverse mortgage and have considered all of your options, you might want to take a closer look at the steps that are outlined in this article. The process of taking care of your mortgage early may seem difficult, but as long as you pay attention to each of these steps, everything should go smoothly. In fact, it can be more enjoyable than getting a regular mortgage loan.
If you want to pay off a reverse mortgage, it is wise to seek expert advice. Therefore, contact a reverse mortgage consultant to know your options. A professional and industry-experienced lender will help you navigate through the process smoothly.
