Can You Reverse A Reverse Mortgage?

A reverse mortgage allows eligible homeowners aged 62 and older to convert part of their home equity into cash without having to sell their home or take on a new monthly mortgage payment. It can provide retirees with extra income to help supplement Social Security or meet unexpected expenses. 

However, reverse mortgages also come with fees, interest, and the risk of default if you don’t meet the loan terms. As a result, heirs may receive less inheritance when the home is sold. So you may be wondering – can you reverse or cancel a reverse mortgage if you change your mind later on?

Yes, it is possible to reverse a reverse mortgage. However, the process can be complex and costly, involving repaying the full loan balance, accrued interest, and fees. Options for reversal include refinancing a portion of the loan, gradual repayment in installments, taking out a new home equity loan or selling the property.

Consultation with a lender and housing counselor is advised. Here’s what to know about canceling or reversing a reverse mortgage, the steps involved, and key considerations.

How Does a Reverse Mortgage Work?

First, it helps to understand what a reverse mortgage is. A reverse mortgage allows homeowners aged 62 or older to convert part of their home’s equity into cash. Common uses include supplementing retirement income, paying for healthcare, or financing home improvements. 

With a reverse mortgage, no monthly mortgage payments are required. The homeowner retains ownership and can stay in the home for life. The loan only needs to be repaid if you permanently move out, sell the property, or upon the death of the last surviving borrower.

At that point, any equity left in the home can go towards repaying the reverse mortgage balance. However, the loan balance continues growing over time as interest and fees accrue. So heirs may receive less inheritance when the home sells.

Reverse mortgages are offered through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program and by private lenders. All reverse mortgages require borrowers to receive counseling to ensure they understand the risks, terms, and alternatives.

Can You Cancel or Reverse a Reverse Mortgage?

Yes, it is possible to cancel or reverse a reverse mortgage, but it can be difficult. Here are some key points:

• Timing – You generally have three business days after closing to cancel for any reason. This is known as the “cooling off” period. Reversing later on is more challenging.
• Contract Terms – Review your reverse mortgage contract closely. Some contracts may allow you to prepay or reverse the loan entirely under certain conditions. Others are less flexible.
• Cost – Reversing a reverse mortgage can be expensive. You’ll need to repay the full loan balance, accrued interest, and fees. Total costs may equal or exceed your home’s current value.
• Lender Cooperation – Some lenders may be willing to negotiate a reverse mortgage reversal, while others won’t. HECM lenders must follow HUD regulations.
• Financial Impact – Repaying a reverse mortgage in full requires having sufficient income/assets. Not everyone can afford reversal. Consult a financial advisor. 
• Foreclosure Risk – If you can’t meet ongoing obligations like taxes and insurance, foreclosure is possible. This makes reversal difficult.

Overall, reversal is possible but not guaranteed. Consult your lender and housing counselor regarding options. Acting within the “cooling off” period is easiest. The later you wait, the harder reversal becomes.

How to Reverse a Reverse Mortgage

If you want to reverse a reverse mortgage, here are some steps to consider:

1. Contact Your Lender

Contact your mortgage lender directly to discuss your intent to reverse the loan and understand the requirements. Ask if they allow reversal and under what conditions. Key questions include:

• Is there a cooling off period I can still use?
• What fees or costs apply if I repay now? 
• Do I need to repay the full balance to reverse?
• Can I negotiate alternate repayment terms?

Know your lender’s rules and get any reversal terms in writing before proceeding.

2. Consult With a Housing Counselor

Get advice from a neutral third-party by meeting with a HUD-approved housing counselor. They can review your situation, explain options clearly, and suggest alternatives you may not have considered. 

Counseling is required for first-time HECM borrowers but is wise for all. Ask your lender for a referral.

3. Review Your Contract and Legal Rights

Dig out your original loan paperwork and read everything thoroughly. Make sure you understand the legal clauses regarding loan repayment, cancellation, defaults, foreclosures, etc. Consider consulting a lawyer if you need help interpreting the terms. 

Knowing your contractual rights makes it easier to negotiate effectively or pursue legal action if needed. Don’t hesitate to exercise your rights.

4. Consider Your Financial Situation and Future Needs

Think carefully about the impact of repayment. Will reversing the loan deplete your savings? Do you require the income from the reverse mortgage? Do you have other assets you could sell instead?

A financial advisor can help analyze the numbers to ensure you make a prudent choice. Don’t reverse the loan if repayment jeopardizes your financial security.

5. Make an Informed Decision

Weigh the benefits vs. drawbacks of reversal using all the data gathered. Ask trusted family or an elder law attorney for advice. Make sure your spouse or heirs are on the same page.

Then decide whether to proceed with reversal, keep the mortgage intact, or pursue alternatives like refinancing a portion of the balance. Act in your best short and long-term interests.

What Are the Options for Reversing a Reverse Mortgage?

If you decide reversing the entire mortgage isn’t prudent, there are a few alternatives to discuss with your lender:

• Refinance a portion – If cash flow is tight, consider refinancing just part of the balance into a smaller forward mortgage. This reduces the reverse loan amount owed over time.
• Repay in installments – Ask whether your lender will allow gradual repayment in installments over months/years rather than a lump sum. This can make reversal more affordable.
• Use a home equity loan – Take out a new home equity loan or line of credit to pay off the reverse mortgage, then repay the equity loan over time.
• Sell the property – Selling the home and downsizing is often easier than coming up with cash to reverse the mortgage. Proceeds from the sale repay the loan.
• Defer payments – In certain cases, a lender may allow temporary deferment of reverse mortgage payments until funds become available.

The key is negotiating an option that reduces financial burden while allowing you to keep the home if desired. Don’t agree to alternative repayment terms you can’t realistically manage.

What Are the Fees and Costs Associated With Reversing a Reverse Mortgage?

Reversing a reverse mortgage can incur significant fees, often totaling thousands of dollars:

• Loan balance – You must repay the full loan amount borrowed plus any unpaid interest. This alone often equals or exceeds the property’s current value.
• Mortgage insurance – For FHA HECM loans, a portion of fees collected go towards mortgage insurance. This isn’t refunded if you reverse the loan. 
• Origination costs – Any mortgage origination points or upfront costs won’t be refunded when you reverse the loan. 
• Legal fees – Expect to pay lawyer fees to review the contract and represent your interests in negotiations with the lender.
• Taxes and insurance – You must be current on property taxes, hazard insurance, HOA fees, and other housing costs before the lender will reverse the mortgage.
• Prepayment penalties – Your contract may specify penalties if you repay the reverse mortgage early or in full. Ask the lender to confirm any prepayment penalties.
• Assessments and repairs – The lender may require a new appraisal or property assessment before reversing the mortgage, especially if the home has deteriorated. You may need to pay for repairs to meet standards.

Add up all these costs before deciding to reverse your reverse mortgage. It’s often cheaper to keep the loan intact rather than repaying the balance in full.

What Are the Risks of Reversing My Reverse Mortgage?

Reversing a reverse mortgage does involve certain risks, such as:

• You may not qualify financially or meet repayment terms set by the lender. This could trigger foreclosure.
• If your home declined in value but your loan grew, you’ll owe more than the house is worth. This makes reversal nearly impossible.
• Repaying too quickly could leave you cash-strapped with no monthly income from the reverse mortgage.
• Your heirs may resent repayment terms that further reduce their future inheritance.
• Failing to repay on schedule due to job loss, illness, etc could damage your credit and lead to foreclosure. 
• You lose the benefits provided by the reverse mortgage that may be hard to replace.

Carefully weigh if benefits of reversing outweigh these potential risks given your situation. It’s often smarter to leave the reverse mortgage intact.

What Are the Alternatives to Reversing a Reverse Mortgage?

If reversing the entire reverse mortgage doesn’t make financial sense, here are a few alternatives to consider:

1. Refinancing the Reverse Mortgage

Rather than fully reversing the loan, you may be able to refinance or modify your reverse mortgage into a smaller loan or line of credit. This can lower interest costs and reduce the amount owed each month.

2. Selling the Home

For many retirees, selling the home and downsizing is easier and cheaper than repaying a reverse mortgage. Shop around to find more affordable housing options.

3. Repaying the Loan in Full

If you have sufficient assets, repaying the reverse mortgage in lump sum when due may be an option. But compare costs of repayment versus sale.

4. Applying for Deferment or Forbearance

In financial hardship, you may qualify for temporary deferment of reverse mortgage payments. This delays repayment until you can afford it.

Conclusion

Reversing a reverse mortgage is possible but often complex. Consider all options – reversal, refinancing, sale, repayment, deferment, or keeping the loan. Consult your lender, counselor, lawyer, and financial advisor to understand your best path forward. 

Act quickly if reversing in the cooling off period. Otherwise carefully weigh benefits versus financial risks, and how reversal impacts your retirement security. Make an informed choice that protects your financial interests short and long-term. With proper planning, you can make smart decisions regarding your reverse mortgage.

Frequently Asked Questions(FAQ)