How to pay off a reverse mortgage early: Strategies and Considerations

A reverse mortgage is perfect for elderly homeowners who want home equity without making monthly payments. But sometimes, because you prefer to pay in early, save on the interest, give more to your heirs, or want peace of mind, paying off a reverse mortgage early might be a smart choice.

In this article, you’ll find everything you should know about reverse mortgages and their payment options to decide if you want to pay off your mortgage early. Let’s dive in!

Understanding Reverse Mortgages

What is a Reverse Mortgage?

A reverse mortgage allows people to get a loan against their home’s equity. But the house's title remains in their name. Unlike traditional loans, it's for people aged 62 and above. A reverse mortgage also doesn’t require monthly payments but gives you other options. The reverse mortgage repayment options are:

• When the borrower dies
• When the borrower moves out of the house
• When the borrower sells the house

How Does a Reverse Mortgage Work?

Here are a few things you should know about reverse mortgages:

• You don’t have to repay the mortgage if you live in the house.
• It's only payable when the borrower dies, moves out, or sells the place.
• The amount you owe the lender grows over time because you don’t make monthly payments.
• According to law, you can never owe the lender more than the house's value when you repay the loan.
• You must pay the property taxes, repairs, and insurance for your house when you own the home. If you don’t, the lender will pay it from the loan or require you to pay the total amount of the loan.

Types of Reverse Mortgage

There are a few different types of reverse mortgages. Let’s see what those types are:

• The local government and the states offer loans. Borrowers can use these loans for specific purposes, like paying property taxes or repairing homes. They are known as low-cost reverse mortgages.
• Another type of reverse mortgage is where banks, the Federal Housing Administration, or private lenders offer loans that borrowers can use for any purpose.

Key Terminology You Need to Know

Here are some words and their meanings that you should be aware of:

• Principal Limit: The maximum amount of loan you can receive from a reverse mortgage.
• Home Equity: it’s the difference between your house’s value and the mortgage's outstanding balance against it. With reverse mortgages, homeowners convert certain portions of their home equity into loans.
• Loan balance: This is the loan amount you owe the lender, including the accrued interest.

Why Consider Paying Off a Reverse Mortgage Early?

Sometimes, borrowers consider paying off a reverse mortgage before the repayment date. 

This decision could be due to various reasons. You might have found a new retirement income, changed your mind, or changed your financial situation.

Potential Financial Benefits

One of the benefits of paying off a reverse mortgage early is that it can reduce the overall interest costs, which the property acquires over time.  If your financial situation is better than when you got a reverse mortgage, you should avoid this growing debt. Borrowers who plan to leave their home to their heirs or prefer to maintain home equity tend to do this more.

Emotional and Psychological Factors

Even if you don't make monthly payments, carrying a reverse mortgage loan can create stress and anxiety for older people. Hence, paying off a reverse mortgage early can create a sense of peace, financial stability, and freedom.

Changes in Financial Situation

If you suddenly acquire a lot of money by selling your other assets or a share in inheritance, paying off your reverse mortgage would be an attractive option. Some borrowers also choose to downsize their house or relocate, which leads to paying off the reverse mortgage on the previous property. 

Options for Paying Off a Reverse Mortgage Early

There are a lot of options for paying off a reverse mortgage. Here's how to repay a reverse mortgage before death:

Selling the Home

Selling the house is one of the easiest ways of paying off a reverse mortgage early. You can sell your home and use the sale money to repay the reverse mortgage while the remaining equity belongs to you.

Pros and Cons

There are specific pros and cons to selling your home.

Pros

• Eliminates the loan balance fully
• You can use the remaining equity for any purpose

Cons

• You would have to move 
• The real estate market is not always favorable

Steps to Take

Here are the steps you can take:

• Hire a real state agent
• Assess the value of the property
• Sell the house
• Get the money
• Pay off the reverse mortgage

Refinancing the Reverse Mortgage

Another way is to refinance your reverse mortgage into a traditional loan to pay it off. Your conventional lender will give you monthly payments to repay the reverse mortgage, allowing you to repay the loan while keeping your home.

Benefits of Refinancing

There are a few benefits of refinancing, such as;

• The traditional payment provides a structural schedule for the payments.
• If interest rates have dropped since you took out the reverse mortgage, refinancing can help reduce overall borrowing costs.

Key Considerations

• There may be closing costs and fees for refinancing.
• You must qualify for the conventional loan based on your credit score, income, and home equity.

Taking Out a New Mortgage

You can apply for a brand new loan, home equity loan, or conventional mortgage and use it to pay off the reverse mortgage entirely. This strategy is a good option if you have good income and assets.

Advantages of a New Mortgage

• It can give you tax benefits. The interest on the new mortgage could be tax-deductible.
• It lets you retain your house ownership while paying the reverse mortgage loan.

Requirements

To qualify for a qualified mortgage, you must meet specific criteria the FHA sets regarding your income, credit score, assets, and ability to make monthly payments.

Making Voluntary Payments

Although not required, you can make voluntary monthly payments towards the principal amount and interest.

How to Make Payments

You can make these payments directly to the lender. Specify whether you want the payment toward the principal or the interest.

Impact on Your Balance

Making these payments can significantly affect your mortgage payment when it is due. It can reduce the loan balance, which reduces the overall interest incurred over time.

Using Cash or Other Assets

If you don't want another loan, you can always pay the mortgage with cash or liquid assets. 

When This Is a Viable Option

However, this option is only suitable for borrowers who have accumulated a lot of savings, received a large sum of money, or received an inheritance.

The Use of Home Equity for Investments

Another option is home equity investments. These entail selling a part of the house's future value for cash, and you can then use it to pay the reverse mortgage.

What You Need to Know

The risk of home equity investment is that the home equity will be shared with other future investment firms, making equity investment at home very risky. But this might be what you want if you wish to stay in the house without paying every month.

Understanding the Financial Implications

Costs Associated with Paying Off a Reverse Mortgage

There might be some costs you should keep in mind:

• Closing fees.
• Administrative costs.
• Prepayment penalties (might apply).
• Lenders might require specific charges.

Tax Implications of Early Payoff

The interest you pay on a reverse mortgage may be tax-deductible. However, paying off the mortgage early might reduce some tax benefits, so it's better to take advice from a tax consultant before proceeding.

Effect on Credit Scores

Early mortgage payments can have a positive impact on credit scores. However, taking out a mortgage to pay off a reverse mortgage can negatively impact credit scores if not done carefully.

The Role of Heirs in Reverse Mortgage Repayment

When the borrower dies, the heirs are responsible for the house and the reverse mortgage repayment. Below are some essential facts to know if you are an heir.

Obligations and Options Available to Heirs

You have three options:

• To keep the house, you must pay the entire loan or 95% of the home’s value.
• You can keep the balance if you sell the house and pay the reverse mortgage. If the loan exceeds the sale price, don't worry—FHA will cover it.
• Provide a deed-in-lieu of foreclosure to the lender.

Timing and Process After Borrower’s Passing

Essential time frames to remember:

• Thirty days: Lender sends Due and Payment Notice.
• Sixty days: Heirs must secure an appraisal for the house.
• Six months: You must repay the loan or sell the house to avoid foreclosure.
• Twelve months: Heirs can get an extension of up to 12 months to repay the loan.

Common Questions About Paying Off a Reverse Mortgage

Can You Pay Off a Reverse Mortgage Before It Is Due?

Yes, although usually not required, you can pay off a reverse mortgage before it's due. You can do this by making monthly payments, selling the house, refinancing the mortgage, or taking out another loan.

What Happens If You Don't Pay It Back?

If you don’t pay the mortgage, the lender will foreclose on the property after the borrower dies or moves out.

Case Studies and Personal Experiences

Success Stories of Reverse Mortgage

People have often found success with reverse mortgages by strategically using their home equity. One couple chose not to sell their stock investments, which provided them with a steady income for ten years.

Another couple avoided monthly payments using reverse mortgages and was able to improve their cash flow and enjoy retirement. They didn't just stop there; they refinanced the reverse mortgage to access more funds for home repairs and a vacation. 

The Bottom Line

Paying off a reverse mortgage early can provide peace of mind and relieve stress. Whether you want to sell your house, make voluntary payments, or refinance, you must do everything after knowing every benefit and drawback.

So, are you ready to explore your options? Contact us for personalized solutions and guidance on reverse mortgages!