Trading equity in your home for extra cash with a reverse mortgage can be a good idea if you need more income in retirement and you plan on staying in your home.
But what happens when you decide to move?
Here’s what you need to know:
When Your Balance is Due
The most important thing to remember is that your reverse mortgage loan amount will be immediately due in full when you move, whether you’ve decided to downsize to a smaller or more accessible home or move closer to relatives.
When to Tell Your Lender
If you’re just considering moving, but you don’t have firm plans, you may not want to notify your lender yet since plans can change, advises Steve Irwin, a reverse mortgage operations consultant who is a board member of the National Reverse Mortgage Lender’s Association.
In fact, even when you first put your home up for sale, you don’t necessarily have to worry about paying off your reverse mortgage loan. Once you’re sure you’re going to move and sell your home, you can discuss with your lender what your plans are, Irwin says.
And you can actually wait to tell your lender about your intent to move, for example, when you find a buyer.
How Much You Owe
When you move, much like what happens when you die, your account is considered “matured” and your balance is due.
When you notify your loan servicer of your intent to move, you’ll receive a payoff demand, a document that itemizes how much you owe your lender.
Your balance will include how much you received in reverse mortgage proceeds, and any costs covered with reverse mortgage proceeds, including mortgage insurance premiums, reverse mortgage counseling costs and appraisal costs as well as any interest that has accrued, according to the Department of Housing and Urban Development.
When you sell your home, you pay off your reverse mortgage with the proceeds of the sale. The amount left over goes back to you.
If your property sells for less than what you owe, you aren’t required to pay the difference. If you have a home equity conversion mortgage insured by the Federal Housing Authority, the FHA will pay the difference. If your reverse mortgage is through a private lender, you don’t have to pay the difference either.
“That is the risk that those lenders are taking. As long as the property is sold at an arms-length transaction, all that gets collected is the proceeds from the sale,” says Irwin. That means you can’t sell your home to a relative for $50 for example, and have the FHA pay the difference, he says. “The lender has no recourse beyond the property itself.”
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