Wondering how to navigate your way out of a reverse mortgage? Discover simple, actionable steps to free yourself from this financial agreement. Read on.
Reverse mortgages: an idea born out of a desire to keep seniors in their homes with an additional source of income. But as with many grand ideas, some resulting pitfalls can create the need to reverse the clock on your reverse mortgage.
If you’re asking: “how can I get out of a reverse mortgage,” let’s explore five common strategies to do so, along with some additional options to fit your financial situation.
In its original form, a reverse mortgage was an upside-down loan that netted seniors a monthly payment from a lender for the remainder of their lives.
In return, the borrower essentially signed the property over to the lender to be sold upon their death. It provided a guaranteed home and income source for the senior and a bit of a gamble for the lender, not knowing how long the property would remain occupied.
Today’s reverse mortgages have more options and limitations. It’s still a way for homeowners to convert home equity into an income stream, but borrowers can choose to receive their funds through one or a combination of these methods:
Factors that make reverse mortgages unique compared to alternative property-based financing (such as home equity loans) include:
While reverse mortgages can provide a solid financial plan for seniors, they’re not always the best deal, especially when a borrower’s health, housing needs, or financial situation shifts.
What are the three types of reverse mortgages? Learn more about them in our guide.
Yes, you can get out of a reverse mortgage, but it may cost you. So long as you comply with the contract terms, your lender is locked into the arrangement until your death or the property’s transfer.
Similar to any other type of conventional mortgage, you’ve agreed to borrow funds in return for a stake in your property, and you can reclaim that stake by paying off the mortgage principal and interest balance.
The most common type of reverse mortgage is the home equity conversion mortgage (HECM) insured by the Federal Housing Administration (FHA).
When you apply for a HECM loan, you must meet with a financial services counselor to ensure you understand all the contract details—including how to get out of a reverse mortgage—before you enter the loan contract. This is particularly key for understanding this first option:
The least costly answer to “how do I get out of a reverse mortgage“ is to exercise your right of rescission. This exit clause gives you three days after closing to cancel the contract for any reason without paying any penalties.
Once notified in writing, your lender has 20 days to refund the money you’ve already paid, and you can walk away free and clear.
Whether you decide to downsize, head to a warmer climate, or move into an assisted living environment, you can always sell your home and use the proceeds to pay off your reverse mortgage.
At closing, before you receive any profits left, your sale proceeds will be applied to:
The mortgage insurance you’ve been paying and the FHA backing come in handy if you do sell. As a non-recourse loan, you’ll be able to sell for 95% of your home’s value or of the loan, whichever is less, without repaying more than you borrowed.4
As interest rates fluctuate and your property value appreciates, you may be able to refinance into a new reverse mortgage with a higher payment or credit line and/or better terms.
With a reverse mortgage refinance, you’ll need to cover:
You can also opt to refinance to a standard rate-and-term or cash-out refinance, which means switching back to making monthly mortgage payments as opposed to receiving monthly income.
With a standard refinance, you’ll need to cover:
Plus, when you apply for a standard or cash-out refinance (vs. a reverse mortgage), the loan approval and offered interest rate will depend on your:
Finally, you can opt to surrender the deed to your home to the lender. This puts the property in the lender’s hands to sell and recoup its costs and keep any profit from the sale.
You’ll still lose your house, but the act of surrendering it vs. it being foreclosed does have a silver lining. Unlike a standard foreclosure, surrendering your deed won’t lead to bad credit or affect your future borrowing ability.
If you’re still at the planning stage, or ready to get out of a current reverse mortgage, look into these alternatives before deciding which path best fits your goals and circumstances.
If we’re judging based on popularity, consider that only about 2% of equity borrowers decide on a reverse mortgage vs. other options.6 Instead, most opt for a:
With any of these options, you’ll need to make monthly repayments of principal plus interest (or, for a line of credit during the draw period, interest only). However, compared to a reverse mortgage loan, these alternatives can provide:
Instead of borrowing against your equity, a sell and stay transaction combines the sale of your home with a switch to renter status in it. Contrary to a reverse mortgage or other equity financing, a sell and stay transaction:
You’ll save on monthly housing costs by eliminating:
You’ll be given the opportunity to rent your home as long as you’d like, as long as you comply with your lease.
If you’re an older homeowner entering retirement years with a bigger home—and more belongings—than you need, consider downsizing to a smaller house or an apartment that will allow you to age in place comfortably. In addition to a home sale that converts 100% of your home equity to cash, financial benefits include:
Our sell and stay transaction allows you to convert your home equity to cash without the headache of a traditional sale.
Instead, you can continue living in your home as a renter, and have a clear understanding of the lease cost and your rent payment expectations. It’s normal to have questions when renting a house, and we’re here to help you along the way.
Ready to learn more? Reach out to us at (314) 353-9757 and one of our representatives will connect with you.
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