When I speak with advisors and their clients, one of the most common questions is, “How does repayment work?” Remember the four words that can put everyone at ease? It’s just a mortgage! Reverse mortgage repayment is pretty straightforward, and even has safeguards in place to protect the borrower and their families. Check out the 3-minute video or text below to see how it works.
When Does the Loan Get Repaid?
When the home is no longer being used as a primary residence, the cash advances, interest, and other finance charges related to the reverse mortgage must be repaid to the lender. ALL remaining proceeds beyond the amount that are owed belong to the borrower, or the estate if the borrower is deceased. In the case of the borrower’s death, the remaining equity can then be transferred to the heirs. NO debt is passed along to the beneficiaries.
In most cases, the home is sold, but if the family wishes to retain the home, they can use whatever means available to repay the lender, including life insurance, other assets, or refinancing the HECM into a traditional loan. It doesn’t matter to the lender, as long as the loan is paid.
HUD requires the repayment conversation to be initiated with the lender/servicer within thirty days of the last surviving borrower’s permanent departure from the home. The executor will then have six months to settle the HECM. Extensions can be granted by HUD for an additional six months.
Repayment Case Study
- Client Age: 70 | Home Value: $200,000 | Available Money Through HECM: $100,000 at an interest rate of 5 percent
- Outstanding Beginning Balance: $100,000
Day One: Clients’ home is worth $200,000. They obtained a HECM and paid off their existing mortgage. After settlement, they now owe the HECM lender $100,000.
If they were to move or decease at the end of week one, the home would be sold and the $100,000 (plus one week’s worth of interest) is owed. The remaining $100,000 will go to them if they move, or pass on to the heirs/estate if the client has deceased.
Ten Years Later: If the client stayed in the home for ten years and chose not to make monthly payments, the interest on the loan will have accrued, and their loan balance will be larger. On the chart, notice that in year ten, they owe the lender $163,000.
The chart also shows the $200,000 home appreciating at about 4 percent over those ten years. It’s now worth $300,000. If they were to move or decease at this time, the home could be sold, the HECM paid off, and they (or their heirs) pocket the difference of $137,000.
How Much Will the Clients Owe in Years 15, 20 and 25?
We may not know exactly what will happen in the future, but we can determine three possible scenarios:
- The client owes $400,000 at some point in the future, and the home is worth $500,000. They and/or the heirs will pocket $100,000 {$500k – $400k = $100k}.
- The client owes $400,000 at some point in the future, and the home is worth $400,000. They and/or the heirs will break even
{$400k – $400k = $0}. - The client owes $400,000 at some point in the future, and the home is worth $300,000. The client now owes more than the home is worth. Enter the reverse mortgage repayment safeguard–the non-recourse feature.
What Does “Non-Recourse Loan” Mean?
Since the HECM reverse mortgage is an FHA Insured Non-Recourse Loan, the lender’s ONLY “recourse” is the net proceeds from the sale of the home ($300,000), even though the client owes $400,000.
The FHA mortgage insurance fund bridges the difference. Neither the client nor their heirs/estate are responsible for repayment of the note, and no deficiency judgment can be taken either.
Still Have Questions? Check Out These FAQs
What happens to my spouse if I pass away first?
If your spouse is a co-borrower of the loan, he or she can continue to live in the home and continue to receive the existing benefits as long as the home is maintained and taxes and insurance are paid. Repayment would not be required at that time, unless your spouse is not a co-borrower on the loan, or until your spouse passes away or decides to move, at which time the loan balance would be due.
What if I decide to sell my home?
As with a traditional mortgage, if you choose to sell your home, the outstanding loan balance becomes due and payable. You or your estate will receive any proceeds exceeding the loan balance.
Can I be forced to sell or vacate my home if the money I owe on the loan exceeds the value of my home?
No. As long as you continue to occupy the property as your primary residence, maintain your home in good condition, and continue to pay your taxes and insurance, you will not be forced to sell or vacate your home – even if the total of the mortgage payments made to you, plus interest, exceed the value of the property. The required Mortgage Insurance Protection (MIP) premium and monthly set aside protects you should your property value experience a decline.
What if I move out temporarily, will the loan become due?
FHA’s policy states that if a borrower remains out of the home for 12 consecutive months, the loan would become due.
What if I want to leave our home to the kids?|
You can still leave it to your children, or to anyone you choose. When the loan becomes due, you or your heirs have the option of paying off the full balance of the loan and keeping the home.
Will I incur any penalties if I decide to pay back the loan early?
No. You can pay back the loan at any time without the worry of being penalized.
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Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
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