To help you through your retirement, you took out a reverse mortgage on your family home. Now, several years into your retirement, you son wants to buy his childhood home so you can move to a warmer climate. Can you sell your home?
A so-called "reverse mortgage" is a home loan that offers regular cash payments (in a single lump sum, a monthly advance, a line of credit, or a combination of the three) to a homeowner based on the home's equity. The borrower must be above the age of 62 (in the U.S.) and the home must be his/her principle residence. Economists proposed the loans as a means of assisting seniors in maintaining a level income, and the IRS does not consider funds from a reverse mortgage to be income, but rather, loan advances.
Typically, the borrower can defer repayment of the loan until he dies, sells the home or moves away from the home for more than 12 consecutive months. When the loan comes due, the borrower or her heirs may refinance the loan, pay the loan with interest or sell the home, cashing out any remaining equity. Alternatively, they may turn the home over to the lender of the reverse mortgage, giving up all claims to the property or the equity in the property. With a HECM (Home Equity Conversion Mortgage), available through the Federal Housing Authority (FHA), the borrower can never owe more than the home is worth, so the lender only has recourse on the property, not the borrower or the borrower's heirs.
Selling the home
The interest on a reverse mortgage compounds over the life of the loan, which means that each month, interest accrues on both the borrowed amount and the unpaid interest. The final mortgage owed may be much higher than the original amount borrowed. If selling the home, here are the first steps to take:
- Determine how much is owed. You will owe all of the money borrowed to-date, compounded interest on that money, and fees that the lender may charge.
- Obtain a payoff quote from the lender. This gives you an estimate of the amount required to pay the loan in full. Remember that a payoff quote is for a specific date or date range, so if the sale takes longer than anticipated, the final amount likely will be higher than the quote.
- Contact your real estate agent. We not only can help you with the sale of your home, we can help determine the fair market value and determine if selling a home with a reverse mortgage is appropriate for your situation.
When the home sells, the reverse mortgage will be paid from the proceeds of the sale. Any remaining monies after paying off your real estate agent and any liens, fees or other loans will be yours.
Remember that the original reverse mortgage loan may be higher than what the property currently is worth. In that case, it may not be in your best interest to sell the home. We can help you determine if selling your home is the right decision for your circumstances.
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