Repaying the Loan
One of the major advantages that make a reverse mortgage an attractive proposition is that homeowners don’t have to make monthly mortgage repayments. It almost feels like free money because in many cases, borrowers don’t even repay the money themselves during their lifetime.
However, as with all types of home equity loans, it has to be repaid eventually. But when and how is the loan repaid if there are no monthly mortgage payments?
Loan Maturity
Typically, a reverse mortgage reaches maturity when the borrower is no longer alive. In case the borrower is married, the loan due date can be delayed until the non-borrowing spouse dies. The loan maturity can also be triggered sooner if the borrower decides to move out of the property permanently.
Under the reverse mortgage loan term, you are considered to have moved out of your primary residence if you are absent from your home for 12 consecutive months. You will default on the terms if you move into a nursing home, live in another home, or travel for an extended period, all of which will mean the loan is due for repayment.
Also, you may need to pay back the loan sooner if you fail to keep up with the homeowner insurance payments, property taxes, or leave the home in a state of disrepair.
While you usually don’t need to make monthly mortgage repayments, you are responsible for home maintenance and paying the required property fees.
Can Your Relatives Pay Off the Loan?
Anyone can pay off your reverse mortgage loan. Your lender is more interested in getting the loan repaid in full than who makes the actual payment.
Your family or heirs can pay the mortgage loan when you pass away, or you can sell your home and make an early repayment without any penalties. You or your estate will keep the difference if the property sells higher than the loan balance.
Mode of Repayment
A reverse mortgage loan is paid all at once and in full upon maturity. You or your heirs cannot pay back the loan in installments.
The lender makes a profit from interest charged on the loan balance. But the good thing is that the balance will never exceed the current market value of your home.
The Non-Recourse Mortgage Advantage
A reverse mortgage is a non-recourse loan, meaning you or your heirs do not have to repay more than the home’s present appraised value, even if the loan balance is higher than the current value of the property when the final repayment is due.
You or your heirs can simply grant a “deed in lieu,” hand over the keys of the property to the lender and become free from the obligation of selling the home. The mortgage insurance premiums on the federally-insured reverse mortgage will make up for any difference in the loan balance.
Monthly Mortgage Payment Option
If you do not plan to move out of your reverse mortgage home, you may wish to consider paying off the loan early. Thankfully, there is no penalty for doing so because most of these loans are covered by the federal governments’ Home Equity Conversion Mortgage (HECM) scheme.
If you choose to make monthly interest repayments, it will prevent negative amortization. A monthly mortgage payment will involve adding the mortgage interest for the year to the loan interest and then splitting that up into 12 months to determine the actual monthly repayment.
Homeowners who wish to explore this option can speak with their tax advisors about the benefits and possible implications of this option. Also, it is important to consult your lender to learn about any applicable payoff instructions before you proceed.
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