What Is the Most Common Way to Repay a Reverse Mortgage?

What Is the Most Common Way to Repay a Reverse Mortgage? 

A reverse mortgage is different from other loan products because repayment is not accomplished through a monthly mortgage payment over time. Instead, the homeowner is discharged from their obligation to repay the loan at the end of the term. 

Most reverse mortgages are paid off upon the homeowner’s death, the release of the lien, or the sale of the home. A home equity conversion mortgage (HECM), the reverse mortgage product insured by the Federal Housing Administration (FHA), is an exception. HECMs allow for the conversion of equity into a lump sum payment. The lump sum can be taken as a cash advance, or it can be used to pay off the first mortgage. In addition, the lump sum can be used to pay off a loan on a mobile home or to pay the homeowner’s property taxes or insurance premiums. 

It is important to understand that this type of loan is not a life insurance policy. If a borrower dies with a HECM, the mortgage is still due. The HECM is only a product that allows the homeowner to access a lump sum of money based on the equity in the home. 

FHA-insured HECMs do not require a borrower to be deceased before a lump sum disbursement is made. If the owner of a home with an FHA-insured HECM dies, the loan may be paid off with the lump sum. There is no age requirement for the borrower of an FHA-insured reverse mortgage. 

How Loan Balance Changes over Time

The loan balance on a reverse mortgage can increase if the loan is not paid off at the end of the term or if there are insufficient funds in the borrower’s account to pay off the loan. Borrowers and heirs can choose to renew the reverse mortgage loan.

Now, it is important to understand that when a borrower renews the loan, the homeowner’s equity and the loan balance will increase.

In general, the loan balance on a reverse mortgage paid off with a lump sum at the end of the term or upon the death of the borrower will be greater than the original loan balance. This is due, in part, to the fees that the homeowner will pay to access the loan prior to the loan’s maturity. 

Obligations of Homeowners

Borrowers have some obligations attached to a reverse mortgage. These obligations may be spelled out in the mortgage contract, or they may be implied. A few of the most important obligations include:

• Borrowers must pay property taxes and homeowner’s insurance. However, the lender will not reimburse the borrower for these expenses. 
• As the borrower’s equity accumulates, the borrower is required to pay assessments. The borrower will receive a bill for these assessments just as he or she does for property taxes and homeowner’s insurance. These assessments may be based on a percentage of the loan value, or they may be a flat, one-time fee. They are usually calculated yearly, but this is not always the case. 
• The borrower must keep the home in good repair. This means that the borrower must maintain the property in the same condition as when the reverse mortgage was issued. The borrower is responsible for all maintenance, repairs, and improvements. 
• The borrower may not sell the property until the lender has been paid in full. 
• When the borrower dies, the surviving spouse will be required to repay the loan. If the surviving spouse cannot repay the loan, the home will be sold to pay off the loan. The proceeds from the sale of the home will be paid to the lender. 

Conclusion

A reverse mortgage is a complex financial product. It is important for borrowers to consider the many factors involved before deciding to take out a loan. The length of a reverse mortgage loan, the size of the loan amount, and the fees charged all influence the borrower’s total costs and the overall financial impact of the loan.

Debt Helpers offers consulting services and creates tailored debt solutions for all Canadian’s whose goal is to become debt-free. Let us help assess the options to pay off the reverse mortgage loan. Contact us today to get started!