How to Get Out of a Reverse Mortgage

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How to Get Out of a Reverse Mortgage

Reverse mortgages are complex financial instruments that provide older homeowners with a lifeline when they need cash flow. However, occasionally circumstances change, and those same individuals come to regret their choice. Is there a way for them to escape a reverse mortgage?

Yes, it is the solution. Depending on the circumstances, it could be best to attempt to leave as quickly as possible.

How a Reverse Mortgage Works

Homeowners over the age of 62 may apply for reverse mortgage loans. A reverse mortgage enables an existing homeowner to borrow money against their equity rather than taking out a loan from a bank to pay for a home or apartment. After that, the homeowner receives payment for the loan in the form of a lump amount, a line of credit, or monthly payments. Reverse mortgage payments are often used to augment Social Security or retirement income.

Although a reverse mortgage might help seniors free up cash flow, it also uses up the equity in your home. While you are residing there, the loan is not required to be repaid. Rather, it is settled when you relocate and sell the home or when you die away, at which time your heirs will sell it and settle the remaining sum.

There are three types of reverse mortgages: home equity conversion mortgages (HECMs), backed by the Federal Housing Administration (FHA); proprietary or jumbo reverse mortgages; and single-purpose reverse mortgages. HECMs are the most common reverse mortgages and are the type that we’ll be discussing.

Right of Rescission

A mortgage counseling session with a counselor accredited by the U.S. Department of Housing and Urban Development (HUD) is a requirement of the HECM application process. During the appointment, the counselor discusses the advantages and drawbacks of a reverse mortgage as they pertain particularly to your circumstance.

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You have three days after closing to cancel if you decide not to proceed with the reverse mortgage after all. This is referred to as your right of revocation.

You have three business days to provide written notice to your lender if you want to use your right of revocation. You guarantee that you meet the deadline, be sure to properly document your request and submit your letter via certified mail. Your lender has 20 days from the time they get your letter to provide a refund for any money you’ve already paid, including origination fees or mortgage insurance payments.

Key Takeaways

  • There are many methods to get out of a reverse mortgage.
  • Use your right to cancel within three days of the closure to avoid fees.
  • Sell your house to recoup the debt.
  • Refinance at a better rate and for a longer time.
  • As a final option, you might renounce the deed and leave.

Pay It Off

The right of revocation is ideal for those who have quick buyer’s remorse, but what about people who experience a change in circumstances years after closing? Perhaps you want to ensure that your non-borrowing spouse or dependents can continue to live in the home after you die away or leave your home as a legacy to your children.

You can always repay a reverse mortgage since it functions somewhat like a loan. The lender would sell the home to recoup the debt if you followed the standard reverse mortgage procedures. If you have alternative financing sources, you may pay back the amount you borrowed in equity plus interest that has accumulated.

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Selling the property on your own is another option for repaying the debt. Selling on your own should be sufficient to pay off the debt and retain the profit from the sale if you are aware that the value of the home has increased. This option may be used by many individuals who are downsizing or going into long-term care.

You may sell your property for 95% of the home’s worth or the loan’s value, whichever is smaller, if you have used up all of your equity plus some. You’ll never have to pay more than what you borrowed since HECMs are FHA-insured.

Important

Your lender will foreclose on the property and sell it to recuperate its expenses if you relinquish the deed and leave. Most of the time, it would be more profitable to sell the home yourself.

Refinance the Mortgage

Reverse mortgage interest rates fluctuate, much like those for conventional mortgages. Refinancing is a possibility if interest rates have decreased or your home’s worth has increased. But take care. It may not be worthwhile to refinance if you don’t expect to remain in your house for a long time. Discuss your alternatives with your mortgage counselor.

Opening a conventional loan to pay off the reverse mortgage is an additional choice. This option will free you from your reverse mortgage obligation, but it will return you to your original situation of paying bank payments.

Walk Away

As a very last option, you may walk away from a reverse mortgage. You will be released from your debt if you turn over the deed to the lender, but you will also lose your home. Most alternative choices are superior.

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Do I need a reason for rescission?

No. You are not need to provide any arguments in order to exercise your right of revocation. Simply state that you have chosen to proceed in a different manner. That’s adequate.

Will I be penalized if I’m underwater in a reverse mortgage?

When using a home equity conversion mortgage (HECM), spending more than your present equity is not subject to a penalty. Non-recourse loans are what they are known as. The Federal Housing Administration (FHA) uses the money you paid for your upfront and yearly mortgage insurance fees to reimburse the difference to the lender if you fall underwater on your reverse mortgage.

Are there early payoff penalties for an HECM?

No. You have the right to pay off your HECM before relocating or dying away. For early payout, there won’t be any penalties.

The Bottom Line

Although reverse mortgages are excellent instruments for giving your finances some breathing space in your elderly years, circumstances might change over time. You always have the choice to pay off your debt, and doing so is the best way to accomplish it if you want to leave your home to your children. Your right of revocation is in place for a purpose if you believe that you hurried into a reverse mortgage. Utilize it with assurance.

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