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How Does A Reverse Mortgage Work?

gifting assets
July 13, 2023 • | Curran Estate & Elder Law, PLLC
A reverse mortgage can make it possible for older homeowners to remain in their home and supplement their retirement income. While you receive a steady influx of cash from a reverse mortgage, it’s ultimately a loan that needs to be repaid.

A reverse mortgage lets seniors borrow against their home equity. 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.  Many seniors find themselves cash poor but have significant equity in their home, which can be accessed by obtaining a reverse mortgage.

Yahoo Finance’s recent article, “How do you pay back a reverse mortgage?” says that the mortgage lender makes monthly payments to you, so they can have the house after you pass away. However, reverse mortgage borrowers or their heirs can also repay the debt.

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. The previous situation can happen if the borrower enters an assisted living facility, moves in with family, or downsizes. However, there are other situations when the loan could need to be repaid sooner, such as 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:

  1. 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 what is left over.
  2. Refinance the mortgage. If you’re the borrower and want to move out but still keep the home, you can refinance your reverse mortgage into a traditional mortgage loan.
  3. Take out a new mortgage. If the borrower’s heirs want to keep the home, they can take out a new mortgage on the house to pay off the reverse mortgage balance.
  4. Provide a deed in lieu of foreclosure. The borrower or their heirs can give the deed to the home to the lender. This is known as 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.

Reference: Yahoo Finance (June 19, 2023) “How do you pay back a reverse mortgage?”

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