Understanding How a Reverse Mortgage Is Repaid

A reverse mortgage is different from a traditional mortgage because you don’t make monthly payments to the lender. Instead, the loan balance grows over time as you receive payments or draw money from the line of credit, and as interest and fees are added. The repayment is generally deferred until a “maturity event” occurs.

A reverse mortgage is repaid in the following situations:

1. When the borrower permanently leaves the home

   • If you move out of the house and no longer use it as your primary residence (for example, you move in with family, sell the property, or relocate to an assisted living or nursing facility for more than 12 months), the loan becomes due.

2. When the borrower passes away

   • At that point, the loan must be repaid. Heirs have the option to either sell the home and use the proceeds to pay off the loan, or refinance into a traditional mortgage if they want to keep the property.

3. If the borrower fails to meet ongoing obligations

   • Even though there are no monthly mortgage payments, borrowers are still responsible for paying property taxes, homeowners insurance, and maintaining the home in good condition. If those obligations aren’t met, the lender can call the loan due and payable.

How repayment works in practice:

• The loan balance includes the money borrowed, accrued interest, and any fees.

• Most often, the home is sold, and the proceeds are used to repay the loan.

• If the home sells for more than the loan balance, the remaining equity goes to you (if you are alive and selling) or to your heirs (if you’ve passed away).

• If the home sells for less than the loan balance, the loan is “non-recourse.” That means you or your heirs are not personally liable — repayment is limited to the value of the home. The Federal Housing Administration (FHA), which insures most reverse mortgages through the Home Equity Conversion Mortgage (HECM) program, covers the shortfall.

Example Scenario:

Imagine you took out a reverse mortgage at age 70. Over 15 years, you received monthly payments and used a line of credit. The loan balance grows to $250,000. At age 85, you move into assisted living permanently, so the loan becomes due.

• If your home sells for $300,000, the loan is paid off in full and your estate or heirs receive the extra $50,000.

• If the home sells for only $200,000, the lender receives the $200,000, and FHA insurance covers the remaining $50,000. Neither you nor your heirs owe that difference.

In summary: A reverse mortgage is repaid when you no longer live in the home, pass away, or fail to meet the loan conditions. The home itself is usually sold to satisfy the balance, and thanks to FHA insurance, you or your heirs will never owe more than the home’s value at the time of repayment.