How To Get Out of a Reverse Mortgage

Paying off the loan isn’t always the best option

Person in front of their home
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Many seniors in need of cash turn to a reverse mortgage. A reverse mortgage allows homeowners age 62 and older to use their home equity to receive payments. The loan isn’t due until the borrower dies, sells their home, or the home is no longer their primary residence. Because interest and fees accrue, the loan balance will increase each month.

A reverse mortgage can be a valuable resource for seniors struggling with expenses. But there are a number of reasons you may want to get out of one. Learn your options for getting out of a reverse mortgage.

Key Takeaways

  • A reverse mortgage doesn’t come due until the borrower dies, sells the home, or moves out, in most circumstances.
  • Most reverse mortgages come with an automatic right of rescission, which gives you three business days to cancel the agreement for any reason.
  • Other options for getting out of a reverse mortgage include buying or selling the property, refinancing, or allowing the lender to foreclose.

How Do You Get Out of a Reverse Mortgage?

The rules for getting out of a reverse mortgage vary by the type of loan you have. Most reverse mortgages are home equity conversion mortgages (HECMs).

Under HECM rules, a reverse mortgage becomes due when:

  • The last surviving borrower dies.
  • You sell your home.
  • The home is no longer your primary residence.

If you decide you want out of a reverse mortgage, you have several options. Here are the most common ways to discontinue your reverse mortgage loan.

Exercise Your Right of Rescission

If you immediately regret taking out a reverse mortgage, you could exercise your right of rescission. Most reverse mortgages give you at least three business days to cancel the loan for any reason. If you pursue this route, you’ll need to notify your lender in writing. Your lender will have 20 days after you cancel to refund any money you paid upfront. If you received any money from the transaction, you’ll need to return it to the lender after you receive your refund.

If you exercise your right of rescission, make sure you send your letter to the lender via certified mail and ask for a return receipt.

Sell the Home

When you sell a home that has a reverse mortgage, you’ll owe the loan principal amount plus interest and fees. If you sell the home for more than you owe, you keep the profit. However, if the loan balance is more than the sale price, money from the sale will go toward reducing the balance. Your mortgage insurance will cover the difference.

Pay It Off

You can get out of a reverse mortgage at any time by paying off the loan. However, this option probably isn’t realistic for most borrowers. After all, many people take out a reverse mortgage because of a cash shortfall. If you’ve inherited a home with a reverse mortgage that has gone into default, you can get out of it by paying off the lesser of 95% of the home’s appraised value or the entire loan balance.

Refinance

You can refinance a reverse mortgage into a new reverse mortgage or a traditional mortgage loan. If you inherit a home with a reverse mortgage, you’ll need to refinance with a traditional mortgage.

Let the Lender Foreclose

If you want to get out of a reverse mortgage for a home you’ve inherited, you could surrender ownership of the property by providing the lender with a deed in lieu of foreclosure.

How Long Do You Have To Get Out of a Reverse Mortgage?

If you’ve taken out a reverse mortgage, you don’t need to pay it back as long as you continue to live in the home as your main residence, you make timely property taxes and home insurance payments, and you keep the property in good repair.

But when you inherit a home with a reverse mortgage, there are a few deadlines you need to follow. You’ll usually have three options: sell the property, buy it, or allow the lender to foreclose. While repayment of the loan is due within 30 days of the time the estate receives a demand letter, you may be able to have up to six months to get out of the reverse mortgage by selling the home or obtaining financing.

If you’re trying to sell a home with a reverse mortgage, you may be able to get two additional 90-day extensions, subject to approval from the U.S. Department of Housing and Urban Development (HUD).

Should You Pay Off a Reverse Mortgage?

You’re allowed to pay off a reverse mortgage anytime. But if you’re the borrower for a home with a reverse mortgage, think very carefully before you do so. You’re under no obligation to repay the loan while you’re still living as long as you keep up with property taxes and insurance, maintain the home, and continue to live there as your main residence. Paying off the loan could cost you money you need for retirement expenses.

If you take a distribution from a retirement account to pay off a reverse mortgage, you could face a significant tax bill.

If you’re seeking better loan terms or need to add your spouse to your reverse mortgage loan, refinancing may be a better option than paying it off. You won’t leave your heirs with debt if you don’t repay the reverse mortgage. Even if the loan balance significantly exceeds the home’s value, they can sell the home. If the sale price is less than the loan balance, mortgage insurance will cover the difference.

If you’ve inherited a home with a reverse mortgage, you’ll need to pay off the loan if you want to keep the residence. If you don’t have the money to pay it off out of pocket, you can get financing through a traditional mortgage.

Frequently Asked Questions (FAQs)

Can I get out of a reverse mortgage if I have been fraudulently sold one?

If you suspect you’ve been the victim of reverse mortgage fraud, you should consult with an attorney. You should also submit a complaint to the Consumer Financial Protection Bureau, or the HUD Office of Inspector General if you are an FHA borrower.

How much equity do I get out of a reverse mortgage loan?

Your lender will determine how much equity you can get based on a number of factors, including your age, the appraised home value, and current interest rates. These factors determine your initial principal limit, which is the total amount you can borrow. You can usually borrow up to 60% of your initial principal limit in the first year.

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Article Sources

  1. Consumer Financial Protection Bureau. “When Do I Have To Pay Back a Reverse Mortgage Loan?

  2. Federal Trade Commission. "Reverse Mortgages.”

  3. Consumer Financial Protection Bureau. "What Happens if I Have a Reverse Mortgage and I Want To Sell My Home?

  4. The New York Bar Foundation. "LGBT Senior Homeowners: What You Should Know About Reverse Mortgages,” Page 2.

  5. Federal Housing Administration. "What You Need To Know if You Inherit a Home That Is Security for an FHA Home Equity Conversion Mortgage (HECM),” Page 2.

  6. National Reverse Mortgage Lenders Association. "What Do I Do When My Loan Is Due?” Pages 2-3.

  7. National Reverse Mortgage Lenders Association. "What Do I Do When My Loan Is Due?” Page 3.

  8. IRS. "401(k) Plans.”