Let’s say you have a Home Equity Conversion Mortgage (HECM). Maybe you got a HECM Line of Credit and waited a decade before drawing on your equity. Maybe you bought a new home in Florida with the HECM for Purchase. In any case, now that you have a reverse mortgage, it’s important to know how it must be repaid. Unlike traditional mortgages, the HECM is a far more flexible financial tool, and the repayment options and details surrounding HECM repayment reflect its flexible nature. Let’s take a closer look at what you’ll have to do, when you’ll have to do it, and how the process works.
Understanding HECM Payment Methods
One of the most distinguishing features of the HECM is that repayments do not have to be made through typical monthly mortgage payments over time – though you are still responsible for paying property taxes, homeowners insurance, and home maintenance costs. Instead, the loan is usually repaid all at once when the loan becomes due and payable. The most common method of repayment is by selling the home. In this circumstance, the proceeds from the sale are used to repay the reverse mortgage in full. Either you or your heirs will typically take responsibility for this transaction and will receive any remaining sale proceeds after the reverse mortgage is paid.
It’s also important to note that the reverse mortgage is a non-recourse loan – for practical purposes, this means that you will never have to pay more than the value of your home at the time the loan comes due. In other words, if your total reverse mortgage debt (including interest) exceeds the value of your home at the time of sale, this excess debt does not need to be paid. Thankfully for many borrowers, this means that if you intend to repay your reverse mortgage by selling your home, you won’t have to worry about your home’s value being lesser than the total loan balance. However, keep in mind that this beneficial non-recourse status applies to HECMs in particular – your mileage may vary with private reverse mortgages.
Alternatively, if your heirs prefer to keep the home rather than sell it, they may choose another form of repayment. Common repayment mechanisms include refinancing the HECM into a traditional mortgage, using their own money to purchase the home, or even refinancing the home into another reverse mortgage in niche circumstances. If the heir chooses to purchase the home, they only pay 95% of the appraised value of the home or the loan balance, whichever is less.
Heirs also have the option of signing the deed over to the lender and walking away from the home if they want nothing to do with it.
Although this isn’t the most popular option, it’s helpful to know that reverse mortgages can also be paid off during the life of the loan. If you choose to make payments on the reverse mortgage throughout its duration, you may do so without penalty. In these cases, it’s helpful to know more about the HECM’s amortization schedule. This schedule involves pertinent details such as the loan’s interest rate, credit line information, remaining home equity, and of course, the loan balance. Some borrowers decide to repay the interest every month in order to prevent the mortgage balance from amortizing unfavorably. For further advice regarding the mechanisms of loan amortization, consider speaking with a qualified financial professional.
When Will You Have to Pay the Loan?
When will the loan have to be repaid? In order to prevent the loan from coming due before you’re ready, it is important to avoid the following scenarios or plan for them in advance. These are the primary situations that will trigger the loan to become due and payable:
- If the home is no longer considered your primary residence, your HECM will come due. This will occur if you are absent for a majority of the year for a non-medical reason or if you are absent for more than twelve consecutive months for a medical reason. Naturally, if you decide to permanently move out, this will cause the loan to come due as well.
- If you decide to sell the home, it will become due and payable immediately. You should inform your servicer of your plans regarding the sale of the home so that you will be aware of their specific policies/requirements.
- When the last surviving borrower or eligible non-borrowing spouse passes away, the HECM will come due.
- Borrowers must follow loan obligations, such as paying property taxes, homeowners insurance, and maintenance expenses. Failure to do so may trigger the loan to become due and payable.
If you have specific questions about the reverse mortgage process, feel free to contact your lender or a financial professional for further assistance.
Remember Your Obligations
While the reverse mortgage can be a powerful and flexible financial tool, it must be wielded wisely. Although you are able to defer repayment for a period of time, you will still have obligations as a homeowner that will not end when the loan closes. It is crucial to remember that you must still pay property taxes, homeowners insurance, and maintenance expenses. In order to remain compliant with the terms of the loan, these obligations must be upheld.