How to Get Out of a Reverse Mortgage
The reverse mortgage loan is engineered to help you finance something in your life while allowing you to remain where you’re most stable and inspired. Unlike a traditional mortgage, you don’t need to make payments to your reverse mortgage lender, you just have to keep up with property taxes and mortgage insurance dues. However, a reverse mortgage is not always in everyone’s best interest.
Looking to back out of a reverse mortgage loan? We’ve compiled our best answers to how to cut the strings on your reverse mortgage and move forward.
Can You Walk Away from a Reverse Mortgage?
The short answer is yes.
The standard contract language does allow you to walk away from a reverse mortgage. However, it’s important to know the repercussions of doing so in order to make an informed decision. There are a variety of reasons an older homeowner may prefer to walk.
Often, this route is considered when reverse mortgage borrowers possess little to no equity in the home and sale proceeds won’t cover the loan repayment.
Factors to consider when walking away:
- Your heirs won’t be eligible to inherit the property
- You forfeit the deed to the reverse mortgage lender, and you will have to relocate
Consider the Type of Reverse Mortgage You Have
Before you can get out of a reverse mortgage, it can help to refamiliarize yourself with the kind of reverse mortgage you have and the protections (and risks) that are built into that mortgage.
#1. HECM Walk-Away Protections
A Home Equity Conversion Mortgage (HECM) is a reverse mortgage insured by the U.S. Federal Government, specifically the Federal Housing Administration (FHA). When it comes to home equity conversion mortgage vs reverse mortgage, HECM reverse mortgage loans are non-recourse loans, which means when you walk away, you’re not responsible for any deficiency loan balance. HECM loans are the most common reverse mortgage option.
HECM borrowers are not responsible for the difference between the sale price and the amount owed to the lender. The bottom line is the lender becomes responsible for any drop in property value.
#2. Non-HECM Loan Walk-Away Considerations
Note that not all homes are automatically insured under HECM. HECM requires that the home be the individual’s primary residence for the duration of the reverse mortgage.
Secondary homes, vacation homes, and rental properties are not eligible for the benefits of HECM reverse mortgage loans. They are considered “non-HECM loans.”
Make sure to take your property type into account and the associated reverse mortgage facts when assessing your options for how to get out of your reverse mortgage.
Reasons to Get Out of a Reverse Mortgage
There are a variety of reasons you might seek reverse mortgage loan closing:
- You need to relocate to a retirement home or nursing home for consistent care
- You have buyers remorse and didn’t anticipate the scale of associated fees
- You don’t want to leave your heirs with debt
- Your property value experiences a significant drop
- You’ve decided to become a 21st-century nomad in your older age and see the world
Though reverse mortgages have been around since the 1960s, they’ve gone through multiple iterations and reforms to help protect reverse mortgage borrowers. Even if you’ve done your research and signed the paperwork, you might find that your own changing patterns or some overlooked details mean this composition is no longer right for you.
Thankfully, there are multiple pathways available to borrowers who are looking to get out of a reverse mortgage.
Options for Getting Out of a Reverse Mortgage
Take the time to weigh your options when deciding how to get out of a reverse mortgage. Each option is tailored to the particular circumstances for changing course or to how far along you might be in your agreement.
Here are five options to consider:
- Repay the loan directly – Paying off the loan with your own funds ensures continued ownership of the property and gets you out of the reverse loan arrangement. Of course, this option is not available to everyone and requires enough supplemental capital. Note that with an HECM reverse mortgage, you or your heirs also have the option to reclaim the property for the lesser amount of the loan or 95% of the appraised home’s value.
- Sell the home and repay the loan – In this option, you will use the proceeds from the home sale to pay the lender. You will have to relocate, but you and your heirs will be free from any outstanding debt. Additionally, if it’s a HECM loan, you’re not responsible for the difference between the fixed selling price and the loan amount.
- Refinance – When comparing a reverse mortgage vs refinance, it depends on how important your home’s value is to you. It is possible to turn your reverse mortgage into a standard loan. The new loan repays your reverse mortgage and resumes standard monthly mortgage payments. If you’re interested in continuing to build equity in your home for you and any future heirs, this might be a good option.
- Walk away – As discussed, walking away and foreclosing on your property can be a last-ditch move if you don’t have excess funds and the sale won’t cover the reverse mortgage.
- Right of Rescission – If you’re early on in the process and encounter immediate buyer’s remorse, this may be the best option for you. The right of rescission allows borrowers a three-day grace period after signing to back out of the agreement and cancel transactions without penalty.
Choosing the Best Option
When it comes to how to get out of a reverse mortgage, there’s no universal, right option for anyone. While some might decide they need to relocate, others might simply feel uncomfortable with their current lender or concerned about transferring responsibility to future heirs and estate managers.
Apply the answers to these three overarching categories when choosing how best to proceed:
- Your property type
- Your financial assets
- Your ideal next steps
The path out of your reverse loan will look different depending on a nexus of factors, including but not limited to: the number of supplemental funds available to you, whether you own one or multiple properties, if you have affordable options for relocation, or if you or your heirs hope to maintain your home’s value and equity in the property.
Alternatives to a Reverse Mortgage
You’re traveling the world, and your house, though loved, maintained, and full of treasured memories, still stands tall. How can you access the latent funds tied up in your property value without tying yourself up in a reverse mortgage?
If you’re hoping to supplement that long-awaited adventure or bolster your retirement, there are still ways to cash in on your property or home’s value. Consider the following alternatives to reverse mortgages:
- Home equity line of credit- This option allows you to maintain ownership and use your home equity as collateral. In doing so, you are eligible to borrow up to a defined credit limit, much like a credit card. Note that these are adjustable-rate loans, so interest rates can fluctuate every month.
- Sell other assets – Appraisal experts are great resources for identifying alternative assets that may hold market value. Many appraisers, such as fine art or collectible experts, will agree to view items gratis or at a discount before charging full report fees to weed out any items not worth the research.
- Sell your home to family – Selling a house with a reverse mortgage can be an effective way to back out of a reverse mortgage and land on your feet. Though you might concede to discounts, selling to family can often ensure your best wishes for the property are upheld. While they get to avoid a competitive market and continue a history, you get both the gratification and the funding to explore, move on, or tie up other ends. It’s a win-win.
Find Solutions with EasyKnock
EasyKnock specializes in alternative home equity solutions. Instead of forcing homeowners to choose between risking their homes or bolstering their financial situation, EasyKnock removes the burden of rushed decision-making and returns power to the homeowner through our sale-leaseback program.
If you’re looking for immediate cash-flow, but don’t have the bandwidth to move quite yet, EasyKnock will purchase your home, converting the equity you’ve built up into cash, while allowing you to remain in the property as a renter. Plus, you retain the right to buy back the home at any point. If you decide you want to eventually move out, EasyKnock will list your house on the market.
Quilting together a well-deserved retirement shouldn’t be decided by big creditors and pressure cookers. Art takes time. Take it, and let EasyKnock finance the masterpiece of your life.