Can you change a reverse mortgage into a regular mortgage?
One of the benefits of a reverse mortgage is that you do not have a monthly mortgage payment, although you are still required to pay property tax, homeowners insurance and homeowners association (HOA) dues, if applicable. The downside of a reverse mortgage is that your loan balance increases over time. The longer the mortgage is outstanding, the higher the loan balance.
Depending on your property value, an increase in your mortgage balance can cause your homeowners equity to decrease over time. If the value of your home does not appreciate as quickly as your loan balance increases, your equity continues to decline. With a reverse mortgage you can never owe more than the value of your property but a significant loss in equity can be concerning.
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If you find yourself in this situation, you may be wondering if it is possible to change a reverse mortgage into a regular mortgage and start making monthly payments to reduce your loan balance. The answer to this question is no and yes.
No, you cannot convert or change a reverse mortgage in a regular mortgage -- also known as a forward mortgage. In short, you are not permitted to change the loan terms including the interest rate and how the loan balance is calculated.
You can, however, pay down your reverse mortgage at any time over the course of the loan. You can make multiple larger payments or consistent monthly payments.
Keep in mind that if you want to make monthly payments like a regular mortgage, the payment must be larger than the scheduled increase in your loan balance. Otherwise, your balance continues to increase and your equity continues to decrease, albeit at a slower rate.
It is also important to highlight that the interest rate for a reverse mortgage is usually significantly higher than the rate for a regular mortgage. This means that it is more challenging and more expensive to pay down your loan balance.
For example, the monthly payment required to pay off a $300,000 reverse mortgage balance is usually higher than the payment required to pay off a $300,000 regular mortgage. This is because the interest rate is higher plus monthly mortgage insurance fees are factored into your payment.
For this reason, if you want to make consistent monthly payments to pay off a reverse mortgage, it usually makes more financial sense to refinance into a regular mortgage. In this scenario, you take out a new forward mortgage and use the proceeds to pay off the outstanding reverse mortgage loan balance. Reverse mortgages do not have prepayment penalties so you do not have to worry about extra fees.
With a regular mortgage you have a required monthly payment but your principal balance decreases over time instead of potentially increasing. Plus, the loan balance decreases more rapidly or the payment required to pay down the balance is lower than for a comparable reverse mortgage. This usually means your homeowners equity grows rather than shrinks over time.
Please note that qualifying for a regular mortgage may be more challenging than qualifying for a reverse mortgage. You need to earn sufficient monthly income to afford the mortgage payment and other housing costs as well as your personal debt expenses.
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Additionally, you need to satisfy the lender’s credit score and debt-to-income ratio requirements. You also must have sufficient equity in your property so that you do not exceed the maximum loan-to-value (LTV) ratio guideline for the refinance. If you have a very high reverse mortgage balance relative to your property value, this may be challenging.
If you are considering refinancing we recommend that you contact multiple lenders in the table below to understand their eligibility guidelines and to compare mortgage terms. It is important to confirm that you can qualify for the refinance before you submit your loan application and incur any costs. Shopping lenders is also the best way to save money when you refinance.
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We should point out that refinancing is not the only way to pay off a reverse mortgage. You can also use your personal funds or the proceeds from selling your home. If you do not have enough money or you want to maintain ownership of your property, then a refinance is likely your best option.
To summarize, while it is not possible to change a reverse mortgage into a regular mortgage, refinancing into a new loan is usually the most cost-effective way to pay down your loan balance. While this approach requires a monthly mortgage payment, you can start rebuilding your equity in your home and save money as compared to paying down the reverse mortgage balance over time.
Sources
"Home Equity Conversion Mortgages For Seniors." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
"Standard Eligibility Requirements." Eligibility Matrix. Fannie Mae, October 2 2019. Web.
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