Reverse mortgages are complicated financial tools that offer a lifeline for senior homeowners who need cash flow. But sometimes situations change, and those same people regret their decision. Is there anything they can do to get out of a reverse mortgage?
The answer is yes. Depending on your situation, it’s possible that the sooner you try to exit, the better.
How a Reverse Mortgage Works
Reverse mortgages are loans available to homeowners over the age of 62. Instead of borrowing money from a bank to pay for a house or condo, a reverse mortgage allows a current homeowner to borrow money against their equity. The loan is then paid to the homeowner in either a lump sum, a line of credit, or in monthly installments. Many use reverse mortgage payments to supplement retirement income or social security payments.
While a reverse mortgage can free up cash flow for seniors, it also depletes the equity in your house. The loan doesn’t have to be paid off while you live there. Instead, it is paid when you either move and sell the house or pass away, at which point, your heirs would sell it and pay the balance.
There are three types of reverse mortgages: home equity conversion mortgages (HECM), backed by the Federal Housing Authority (FHA), proprietary or jumbo reverse mortgages, and single-purpose mortgages. HECMs are the most common reverse mortgages and are the type we’ll be discussing.
Right of Rescission
Part of the application process for a HECM includes a mortgage counseling session with a U.S. Department of Housing and Urban Development (HUD)-accredited counselor. The counselor explains the benefits and consequences of a reverse mortgage during the session as they apply specifically to your situation.
If you decide to go ahead with the reverse mortgage and then have second thoughts, you have three days after closing to back out. This is called your right of rescission.
To exercise your right of rescission, you must inform your lender in writing within three business days. Make sure you document your request and send your letter by certified mail to make sure you hit the deadline. After receiving your letter, your lender has 20 days to refund any money you’ve already paid, such as origination fees or mortgage insurance premiums.
- You can get out of a reverse mortgage in a variety of ways.
- Use your right of rescission within three days of closing for no penalties.
- Sell your home and pay the loan back.
- Refinance into a more favorable rate and term.
- As a last resort, you can walk away by surrendering the deed.
Pay It Off
Right of rescission is perfect for those that have immediate buyers regret, but what about those that have a change in the situation long after closing? Maybe you want to leave your house as an inheritance for your children or make sure your non-borrowing spouse or dependents can stay in the house after you pass away?
Since a reverse mortgage is essentially a loan, you can always pay it back. If you followed the usual routine of a reverse mortgage, the lender would sell the house to repay the mortgage. You can pay what you’ve taken out in equity plus interest accrued if you have other funding sources.
Another way to pay back the loan is to sell the house yourself. If you know that the house value has gone up, then selling on your own should be enough to repay the loan and keep the profit from the sale. Many people moving to long-term care or downsizing to a maintenance-provided home might use this solution.
If you have expended all the equity in your home, plus some, you can sell the house for 95% of the home’s value or the loan’s value, whichever is less. Since HECMs are insured by the FHA, you’ll never have to pay more than what you borrowed.
If you surrender the deed and walk away, your lender will foreclose on the home and sell it to recoup its costs. Selling the house yourself would almost always be a more lucrative option.
Refinance the Mortgage
Like traditional mortgages, interest rates for reverse mortgages go up and down. If interest rates have gone down or your house value has gone up, refinancing is an option. But beware. Depending on how long you plan to stay in your home, it may not be worth paying the upfront fees to refinance. Talk to your mortgage counselor about the options.
Another option is to open a conventional loan to pay off the reverse mortgage. This avenue will release you from your reverse mortgage commitment, but it will put you right back where you started: making payments to the bank.
You can walk away from a reverse mortgage as a last resort. Handing over the deed to the lender will release you from your loan, but you will also lose your house. Most other options are better.
Do I Need a Reason for Rescission?
No. You don’t have to make any justifications for exercising your right of rescission. Simply say that you have decided to take another course of action. That is sufficient.
Will I Be Penalized if I’m Underwater in a Reverse Mortgage?
On HECMs, there is no penalty for spending more than your current equity. They are called non-recourse loans. If you go underwater on your reverse mortgage, the FHA pays the difference to the lender out of the money paid for your upfront and annual mortgage insurance premiums.
Are There Early Payoff Penalties for a HECM?
No. If you want to pay off your HECM before moving or passing away, that is your right. You won’t be penalized for early payoff.
Reverse mortgages are great tools for financial breathing room in your golden years, but situations change over time. Paying off your loan is always an option, and if you want to leave your house to your children, this is the best way to do it. If you feel that you’ve rushed into a reverse mortgage, your right of rescission is there for a reason. Use it with confidence.