How to Repay a Reverse Mortgage

Reverse mortgages may have the word “mortgage” in the name, but unlike a traditional mortgage, you aren’t required to make any regular payments during the term of the loan. You do have to pay back the lender eventually though. Here are some of the ways you can pay back a reverse mortgage lender.

When You Sell Your Home

You’re required to pay back your reverse mortgage when you sell your home and the reason for that is simple. Your home is securing the reverse mortgage. When it’s sold, nothing is securing it anymore. As such, it must be fully paid back.

Be sure to keep this in mind when you’re considering selling your home. If you still need the money elsewhere, it might be a good idea to delay selling your home until later on if you can.

You Move Out of Your Home

Let’s say you feel that you can no longer take care of yourself and you decide to move to a nursing home. Even if a family member starts living in your home, you’re almost certainly required to pay back the reverse mortgage. That’s because the reverse mortgage contract is between you and the lender. It’s not between anyone in your family and the lender.

If this is something you’re considering doing, make sure you speak to your reverse mortgage lender ahead of time, so that you’re fully aware of any amounts you will need to repay by moving out of your home.

Changing the Use of Your Home

In order to qualify for a reverse mortgage, one of the most important rules is that it has to be your primary residence. If you were to change it to a rental property, you may no longer qualify. Before you do that, you’ll want to speak to your lender. You wouldn’t want to change the property to a rental property, only to find out that you need to pay back your reverse mortgage right away, when you didn’t think you had to.

The Younger Borrower Passes Away

A benefit of a reverse mortgage is that when one spouse passes away, the spouse is who still living takes it over. That means that as the younger spouse you can continue to live in the family home without needing to pay back anything until you pass away or one of the above two scenarios play out.

However, when you eventually pass away after your spouse, that’s when the reverse mortgage will need to be repaid with whatever equity is left. There may or may not be enough equity to gift your loved ones at this point if that’s something you want to do, so be sure to consider that.

Defaulting on the Loan

Although you aren’t required to make any payments, you can still default on it. It depends on the terms and conditions of the reverse mortgage contract that you signed. The definition of defaulting varies by lender. Although using the funds for an illegal purpose is considered defaulting by pretty much all lenders. As is not being truthful on your reverse mortgage application.

Fully or Partially Open

Something important to note is that similar to a HELOC or an open mortgage, some reverse mortgages are fully open. That means you can repay some or all of a reverse mortgage at any time. However, it’s important to read the fine print. While some reverse mortgages are fully open, others are closed. That means that you could incur a penalty by paying it off early.

If you come into money and you’re thinking of paying your reverse mortgage off early, you’ll want to know the penalties and fees ahead of time before doing it, so that you can make a fully informed decision. If you come into money and the penalty for paying off the reverse mortgage is hefty, you might be better off investing the funds instead.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.