With all the negative publicity surrounding reverse mortgages these days, even I sometimes forget that for some people, they can still be very helpful. I’ve previously written about how reverse mortgage proceeds can be used responsibly to pay expenses associated with home-ownership (i.e. property taxes, insurance, maintenance/renovation). Below, I want to explain how they can also be used responsibly to pay off existing mortgage debt.

It’s actually pretty straightforward. In fact, when you apply for a reverse mortgage, it’s not even necessary to indicate what the proceeds will be used for, which means you don’t have to worry about filling out additional forms if you plan to use the proceeds to pay off your primary mortgage. You simply obtain the reverse mortgage for the amount of principal outstanding on your primary mortgage (plus the fees associated with the reverse mortgage), and deposit the funds in your checking account, and mail a check to your mortgage server. Voila! You now no longer have a primary mortgage.

Of course, you first need to make sure that your reverse mortgage will be large enough to cover the outstanding balance of your primary mortgage. The maximum loan amount depends on a number of factors, namely your age, prevailing interest rates, and the appraised value of your home. Simply, consult this matrix of FHA HECM loan limits, and multiply the applicable percentage to the value of your home. Unfortunately, the FHA continues to lower these limits (in order to protect the solvency of the HECM program), and if your primary mortgage exceeds 50% of the value of your home, you probably won’t be able to obtain a reverse mortgage that is large enough to completely pay off your primarymortgage balance. What’s more- most lenders won’t issue you a reverse mortgage if you still have an outstanding primary mortgage, and the upshot is that you will need to wait a few years and/or hope that your home appreciates in value.

The merits of obtaining a reverse mortgage to pay off a primary mortgage are certainly debatable. On the one hand, reverse mortgages are inherently expensive, and if you obtain a large reverse mortgage (relative to the value of your home) and use all of the proceeds to pay off your primary mortgage, you probably won’t have much equity left in your home after 20 years.  On the other hand, most financial planners will tell you that it’s wise to pay off all of your debt shortly after entering retirement, since your incoming cash flow will be minimal, and may not be enough to cover your debt service obligations. If you accept this line of reasoning, then obtaining a reverse mortgage could be the most straightforward (if the not the only) solution to paying off your primary mortgage will still remaining in your home.

Just remember that there is no free lunch, and that the payments that you otherwise would have been making on the primary mortgage are now accumulating in the form of unpaid interest/principal under the reverse mortgage, and will need to be repaid when the borrower moves out or passes away.

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