This article was originally published on Point.com on July 2, 2020.
If I tried to sell you a concrete saw, would you buy it? Probably not, unless you really needed one. The same thing is true for reverse mortgages. They’re a tool and they can be very helpful if you need them, but they’re not right for everyone. This article will go into how to get out of a reverse mortgage.
That’s especially true considering the downsides of reverse mortgages. There are a lot of them, and you wouldn’t be the only one who might be rethinking this whole reverse mortgage deal. If you have one yourself, you might even be wondering how to get out of a reverse mortgage.
The truth is that it can be hard to get out of a reverse mortgage. You’ll need to find some way to pay off the loan. Luckily, you have a lot of options for how to pay back a reverse mortgage.
The Panic Button: Three-Day Rescission Period
Your best option for getting out a reverse mortgage involves a little-known stipulation called the rescission period. It’s available with Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage.
If you change your mind at any point during the three business days after you sign the contract, you can pull the plug. It’s like returning a product to the store. You’ll have to return any of the money you borrowed, and the lender will return any of the financing charges you paid so that it’s as if the reverse mortgage never even happened in the first place.
In order to make sure it’s official, the Federal Trade Commission also recommends notifying your lender that you’ve changed your mind by sending them a letter by certified mail. Keep copies, and ask for a return receipt so that you know your request was received. That way, everything is documented in case any issues arise later on.
How Do You Pay Back a Reverse Mortgage?
The three-day rescission period is good, but what if you’re outside of that time frame? In that case, there’s only one way to get out of a reverse mortgage: by paying it off. After all, it is a loan, and just like any other loan, the only way to be released from it is to pay off your outstanding balance.
If you took out a large lump sum or you’ve been getting payments from your reverse mortgage for a while, that balance might be quite large. In addition, some of your options for paying off the reverse mortgage are to replace it with another type of loan such as a home equity loan or even a traditional mortgage.
These require monthly payments on their own and the risks you take on are different. You may also need a good credit score and a steady source of income in order to be approved. For these reasons, it’s important to speak with a financial advisor before trying any of these maneuvers.
Here are some of the ways you can pay back a reverse mortgage:
Sell Your Home
Reverse mortgages are generally paid off when your home is sold, either when you move out or pass away. If keeping your home isn’t as important to you, now may be a good time to consider selling it.
You can use the proceeds to pay off the reverse mortgage. With the leftover funds, you could downsize to a smaller home, move to join family across the country, or fund the remainder of your retirement. Keep in mind that downsizing to a smaller home has its own advantages because you won’t necessarily be paying as much for your home’s upkeep going forward.
In addition, if you owe more on your reverse mortgage than your home is actually worth, selling it may be your best option if you have a HECM. That’s because if you sell your home for its fair market price, you won’t have to pay back more than the home is worth.
Use Your Savings
Another option for how to get out of a reverse mortgage is to simply pay back the loan with cash. If you recently came into an inheritance or another windfall, you can pay off the reverse mortgage in one fell swoop.
If you don’t have enough money to pay off the reverse mortgage now, you can still pay as much as you want at any time to reduce the balance on your reverse mortgage. When the balance hits zero, you’ll be released from the loan. In this case, it’s important to look at your budget to see what you can afford to pay each month.
Over time, you may be able to pay off the reverse mortgage entirely. Remember, though — anything you put towards paying down the reverse mortgage now is less money you’ll have in the future.
Use a Home Equity Line of Credit
You can also opt to pay off a reverse mortgage with a Home Equity Line of Credit (HELOC). This works much the same way as the reverse mortgage does. You can use part of your home’s equity to get immediate access to money, which you can then use to pay off the reverse mortgage.
You can get a HELOC from many banks and credit unions today. They may come with fewer fees than a reverse mortgage. The biggest disadvantage for older homeowners, however, is that you’ll need a reliable source of income and a good credit score to qualify. If you don’t use the HELOC you won’t need to pay anything, but once you borrow money from your revolving line of credit, you will need to make monthly payments until the HELOC is paid off.
Use a Conventional Mortgage
One of the more interesting ways to pay off a reverse mortgage is by doing the opposite and taking out a conventional, or forward, mortgage, much like you did when you first bought your home. This takes away some of the risks of the reverse mortgage. But again, most people opt for a reverse mortgage in the first place because of the advantage of not having to make monthly payments.
Use a Home Equity Loan
A home equity loan is similar to a HELOC, except that you take out all the money as a lump sum rather than having access to a line of credit you can choose to use or not. It’s not a revolving line of credit, so you’ll need to plan and budget carefully if you’re expecting to use some of the money to tide your living expenses over for a while. It may also allow you to pay off your reverse mortgage, but you’ll be replacing it with another financial product that comes with monthly payments.
Use a Home Equity Investment from Point
Your home’s value will generally go up in the future, but what if you could use that money today? That’s what a Home Equity Investment (or HEI) from Point does.
It has the advantage of giving you a lump sum — which you can use to get out of a reverse mortgage if you wish — and doesn’t require any payments until the 30-year term is up. In addition, it’s more flexible than a reverse mortgage. For example, your heirs can take over the HEI if they’d like to keep the house.
If replacing your reverse mortgage with another debt product doesn’t make sense for you, looking into an HEI can be a better option. Make sure to consult with a financial advisor so that you can be sure to select the best choice for you.