A reverse mortgage can make it possible for older homeowners to remain in their home and supplement their retirement income.

While you receive a steady influx of cash from a reverse mortgage, it’s ultimately a loan that needs to be repaid.

How do you pay back a reverse mortgage, and when does repayment become necessary? Here’s what you need to know.

How does a reverse mortgage work?

A reverse mortgage allows seniors to borrow against their home equity. Home equity conversion mortgages (HECMs), the most common type of reverse mortgage, are available to homeowners 62 and older. With a reverse mortgage, instead of the borrower making monthly payments as with a mortgage, home equity loan, or line of credit (HELOC), the borrower receives monthly payments from their mortgage lender.

“You’ve already got a home, and the mortgage lender makes monthly payments to you, so they can get your house after you pass away,” explains Tabitha Mazzara, director of operations at MBANC, a mortgage lender.

That said, reverse mortgage borrowers or their heirs can choose to repay the debt.

To protect the borrower and potential heirs, lenders are required by law to structure reverse mortgages so that the loan amount doesn’t exceed the value of the property — and if the borrower dies, the estate will not be responsible for paying the difference if the loan ends up being greater than the home’s value. This can occur if home prices steeply decline, or if the borrower lives longer than projected life expectancy.

When do you need to pay back a reverse mortgage?

A reverse mortgage must be repaid in full if the last surviving borrower or eligible non-borrowing spouse:

  • Dies
  • Sells the home
  • No longer lives in the home as their primary residence

The last scenario can occur if the borrower enters an assisted living facility, moves in with family or downsizes.

“Most people repay the loan when the owner dies, since the majority of people who use reverse mortgages are those who already have a significant amount of home equity,” says Cliff Auerswald, president of All Reverse Mortgage, a reverse mortgage lender.

There are other situations, though, when the loan could need to be repaid sooner. This can happen if the borrower stops paying homeowners insurance or property taxes on the home, or stops maintaining the home and it falls into disrepair.

How long do heirs have to pay off a reverse mortgage?

If the last surviving borrower or eligible non-borrowing spouse on a reverse mortgage loan dies, it falls to the estate and heirs to repay the debt.

According to federal regulations, heirs are required to repay the full loan balance or 95 percent of the appraised value of the home, whichever is less.

The lender will typically provide the heirs with options for repayment, after which they’ll have 30 days to make a decision. Depending on where you live, you may have longer to actually pay off the loan.

“The exact time frame is usually decided by the state,” Auerswald says. “Most reverse mortgages are due within one to six months after the owner has died.”

Can a relative pay off a reverse mortgage?

Anybody can pay off a reverse mortgage, including the borrower, their spouse, their heirs or other relatives. This is most common in scenarios where the last surviving borrower or eligible non-borrowing spouse dies, and the heirs choose to pay off the loan.

How do you pay back a reverse mortgage?

There are a few different ways you can repay a reverse mortgage. The following options include how to pay off a reverse mortgage early or when it comes due:

Option 1. Sell the home

Once payment comes due, either the borrower or their heirs can decide to simply sell the home to pay off the loan. The proceeds of the sale go first toward paying off the lender. The borrower, or their estate, keeps whatever is left over after paying the debt.

Selling the home is still an option, even if the home’s value is lower than the loan’s balance.

The Federal Housing Administration (FHA), the agency that backs HECMs, considers the loan terms satisfied if the borrower or heirs sell the home for 95 percent of its appraised value.

Option 2. Refinance the mortgage

If you’re the borrower and you want to move out but still keep the home, you can refinance your reverse mortgage into a traditional mortgage loan. Just remember that you’ll need to start making payments on the new loan to keep the home.

“Refinancing it back into a traditional loan will mean having to make regular payments toward the mortgage again,” Mazzara says, “but it would also mean keeping the house as part of your estate.”

Option 3. Take out a new mortgage

If the borrower’s heirs want to keep the home, they can simply take out a new mortgage on the house to pay off the balance of the reverse mortgage. This is much like refinancing the loan as the original borrower.

The heirs can then use the home however they wish, so long as their mortgage allows for it. For example, they choose to live in the home or use it as an investment property.

Option 4. Provide a deed in lieu of foreclosure

If all else fails, the borrower or their heirs can simply give the deed to the home to the lender. This is known as deed in lieu of foreclosure because it is usually the last resort before allowing the lender to foreclose on the home.

Bottom line

Whether you’re the borrower on the reverse mortgage or you’re an heir trying to resolve a reverse mortgage after a loved one has died, take your time to consider your options before you make a decision. It would be wise to consult with a financial advisor or real estate attorney to determine whether to hold onto the home or to simply sell it and pay off the debt. Keep in mind there are significant costs and risks associated with these mortgages, so this should not be a first avenue to explore if you need more retirement income.