The elimination of monthly mortgage payments is a big selling point for homeowners considering a reverse mortgage. Since many borrowers don't even have to pay back their loans in their own lifetimes, the money essentially becomes free.
Unfortunately, it is necessary to repay this loan in the future just like any other form of home equity loan. But if there aren't any regular mortgage payments, when and how will the loan be paid back to reverse mortgage lenders?
Term's End in a Loan
When the borrower dies, the reverse mortgage is considered fully paid off. A loan's repayment date may be extended until the death of the borrower's non-borrowing spouse. If the borrower decides to permanently vacate the property, this can potentially accelerate the loan's maturity.
If you aren't living in the home you put your reverse mortgage on for more than 12 months, the bank will consider you to have permanently relocated. If you go into a nursing home, change residences, or go away for an extended period of time without paying back your loan, you will be in default of the terms.
If you don't pay your property taxes or homeowner's insurance on time or if you let the house fall into disrepair, the lender can demand that you pay back the loan sooner.
You won't have to make mortgage payments every month, but you will have to pay for repairs and homeowner's insurance on your own.
Do You Know If Your Relatives Can Repay the Loan?
A reverse mortgage loan can be repaid by virtually anyone. Your lender cares more about getting their money back than they do about who is making the payment.
You can have your heirs take care of your mortgage when you die away, or you can sell the house and pay it off early without any penalties. If the sale price of the property is higher than the outstanding loan sum, the excess will be yours to keep or pass on to your heirs.
The Method of Repayment
At the end of the term, you'll get paid back in full on a reverse mortgage loan. The debt cannot be repaid in instalments by you or your heirs.
The interest collected by the lender is how they turn a profit on the loan. The loan total, however, will never exceed the home's fair market value, which is good news.
Pros of Getting a Mortgage That You Don't Have to Pay Back
In the event that the outstanding loan debt at the time of final repayment exceeds the home's appraised worth, neither you nor your successors will be responsible for making up the difference.
With the execution of a “deed in lieu,” either you or your heirs can release the lender from the obligation to sell the property by simply turning over the keys. The federally insured reverse mortgage's mortgage insurance payments will cover any shortfall.
Mortgage Payments Can Be Made Monthly
You may want to explore prepayment of your reverse mortgage if you have no intention of selling the property. Most of these loans are protected by the federal government's Home Equity Conversion Mortgage (HECM) programme, so fortunately, there are no repercussions for doing so.
Negative amortisation can be avoided by making interest payments on a regular schedule, such as once per month. Calculating a mortgage payment each month entails adding the annual mortgage interest to the annual loan interest and then dividing the total by 12.
Owners curious about the advantages and potential repercussions of this choice should consult tax professionals. You should also contact your lender to confirm that you understand any payback instructions that apply.