Though many believe it’s impossible to walk away from a reverse mortgage, the opposite is true. The terms of a reverse mortgage do not prevent borrowers from paying off the mortgage early or selling the home. Here are three common ways that borrowers exit reverse mortgages.
Change Your Mind
Borrowers taking a reverse mortgage have three days after signing the paperwork to change their minds and walk away from their reverse mortgage. This is known as the right of rescission, and it is true for all mortgages.
To exercise the right of rescission, borrowers must notify the lender in writing via certified mail within three business days of the closing. The letter should detail that the borrower no longer wishes to take the reverse mortgage. The certified mail postmark proves that the borrower met the deadline. It represents written documentation of the intention to rescind. Once the lender receives the letter, they have 20 days (about three weeks) to return any funds they have already received from the borrower. These funds may include mortgage insurance premiums and origination fees.
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Pay Off the Loan
Sometimes a borrower decides to pay off their reverse mortgage several months or even a year after closing. The passage of time doesn’t mean borrowers can’t satisfy or pay down their reverse mortgage. For instance, a borrower who decides they would like to leave substantial equity to their heirs can choose to pay down or pay off the reverse mortgage before a maturity event occurs. While it is rare for people to exercise this option, potential borrowers need to understand that it exists. Contrary to a common myth, a reverse mortgage has no prepayment penalty.
Sell Your House
Reverse mortgage borrowers can sell their homes anytime to satisfy their loan balance. The borrower will always receive any sale proceeds that exceed the loan balance. Conversely, as non-recourse loans, you will never owe more than the home’s market value when it is sold to satisfy the loan.
Retirees wishing to downsize or move into a long-term care facility can take advantage of this option. This way of exiting a reverse mortgage can be especially advantageous when the housing market is high, and borrowers have more home equity than when they took the loan.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
