Can You Pay Off Your Mortgage With a Reverse Mortgage?

Yes. Using a reverse mortgage to pay off mortgage debt is one of the most common reasons homeowners 62 and older take one: the reverse mortgage retires your existing loan at closing, and the required monthly principal and interest payment ends. It works when the amount the reverse mortgage can lend, after costs, covers the payoff. When it falls short, you bring the difference to closing or the loan does not happen. You still pay property taxes, homeowners insurance and upkeep, and the new loan balance grows over time.

For a lot of the people I sit down with in Bend, the mortgage payment is the single largest line in the retirement budget. It was sized for a working income, and now it is being paid out of Social Security, a pension and withdrawals from savings. Taking it away changes the monthly math more than almost anything else a retiree can do, without selling the house.

This page covers the mechanics that decide whether it works: why a reverse mortgage has to pay the old loan off rather than sit behind it, how HUD's first-year limit treats the payoff, three worked examples from a Bend home, what happens when the numbers come up short, the seasoning rule on recent loans, and what changes in your budget the month after closing. It goes deeper on one use than my home equity retirement income guide, where eliminating the mortgage payment is one of four jobs home equity can do.

This material is not from HUD or FHA and was not approved by HUD or a government agency. A reverse mortgage is a loan that must be repaid, not a government benefit. Figures on this page are illustrations based on HUD's published factors, not a quote or a commitment to lend.

Using a Reverse Mortgage to Pay Off Mortgage Debt: The Short Answer

Three things are true for every borrower who uses a HECM, the FHA-insured reverse mortgage, to retire an existing loan.

1. The payoff is required, not optional. A HECM has to be the first lien on the home, so any existing mortgage, home equity loan or HELOC is paid off from the reverse mortgage at closing.
2. The payoff counts toward the first-year limit in a way that helps you. HUD caps what you can draw in the first twelve months, but paying off an existing lien is a mandatory obligation, and mandatory obligations can take you past the usual 60 percent cap.
3. The payment goes away; the obligations do not. There is no required monthly principal and interest payment on a reverse mortgage. Property taxes, homeowners insurance, HOA dues, maintenance and living in the home as your primary residence all remain your responsibility, and falling behind on them can make the loan due.

So the real question is not whether you can use a reverse mortgage to pay off mortgage balances. You can. The question is whether yours fits inside your principal limit, and what is left over when it does.

Why a Reverse Mortgage Has to Pay Off the Existing Mortgage

HUD's HECM regulations define the mortgage itself as "a first lien on real estate" (24 CFR 206.3). A reverse mortgage cannot stand in line behind a bank that already holds the first position. The existing loan has to be retired at or before closing.

A second rule closes the door on leaving anything behind. Under 24 CFR 206.32, after the initial payment of loan proceeds there can be no outstanding or unpaid obligations from the transaction, apart from permitted servicing charges and a repair set-aside if one is required. In plain terms, the closing has to leave the reverse mortgage as the only loan in the picture.

That is why, when you use a reverse mortgage to pay off mortgage debt, the payoff is written into HUD's list of mandatory obligations in 24 CFR 206.25(b): "amounts required to discharge any existing liens on the property." The same list includes the upfront mortgage insurance premium, the origination fee, the counseling fee, title and recording costs, the appraisal, any delinquent federal debt, and property taxes or insurance the lender requires to be paid at closing.

This is also the difference from the product I describe on the reverse second mortgage page. That is a proprietary loan designed to sit behind a low-rate first mortgage you want to keep. A HECM does the opposite: it replaces the first mortgage.

How the First-Year Limit Treats a Reverse Mortgage to Pay Off Mortgage Balances

Your principal limit is the most a HECM can lend, set by the age of the youngest borrower or eligible non-borrowing spouse, the expected interest rate, and the home's value up to the 2026 FHA limit of $1,249,125. The guide to how much you can borrow walks through HUD's table in detail.

HUD does not let all of the principal limit go out the door in year one. For an adjustable-rate HECM, 24 CFR 206.25(a) caps what can be disbursed at closing and during the first twelve months, and FHA has set that cap at the greater of:

• 60 percent of the principal limit, or
• your mandatory obligations plus an additional 10 percent of the principal limit.

FHA set those percentages by mortgagee letter in 2014, and HUD's 2017 final rule wrote the structure into the regulation. Either way, the total can never exceed the principal limit itself.

This is the rule that makes a reverse mortgage to pay off mortgage debt workable. If you own your home outright, the 60 percent branch usually governs. If a large mortgage has to be paid off, the second branch lets the payoff and closing costs go through in full, plus 10 percent of the principal limit for anything else you want in the first year. Whatever is left becomes available after the twelve months, and in a line of credit it grows in the meantime.

One detail catches people. At closing you choose how much of that extra 10 percent to draw or keep available during the first year, and under 206.25(a)(1)(v) you cannot change that election afterward. It is worth deciding with the numbers in front of you, not in the closing room.

Reverse Mortgage to Pay Off Mortgage Balances: Three Bend Examples

Take a Bend homeowner, age 70, in a home appraised at $750,000. At a 6.0 percent expected rate, HUD's principal limit factor for age 70 is 41.5 percent, so the principal limit is $311,250. Closing costs financed into the loan: an upfront mortgage insurance premium of 2 percent of $750,000 ($15,000), the origination fee at its $6,000 cap, and about $4,000 of counseling and third-party costs, roughly $25,000 in all. Now change only the balance on the existing mortgage.

The first row is the comfortable case, and the most common one I see. The payment disappears, there is a modest amount available right away, and more than $100,000 of the principal limit waits for month thirteen. In a reverse mortgage line of credit, that unused portion grows over time at the same rate the loan balance does.

The second row still works, but it is tight. The payoff consumes almost everything. The monthly payment is gone, which may be the entire point, but there is little cushion for a roof, a car or a medical year.

The third row does not close on its own. Age changes that. Make the same homeowner 80 instead of 70, and the factor rises to 48.8 percent, the principal limit to $366,000, and the same $320,000 payoff fits with $21,000 to spare. Make the homeowner 62, and the factor drops to 35.7 percent and the principal limit to $267,750, so even the $260,000 balance in row two comes up $17,250 short.

These are illustrations using HUD's published principal limit factors at a single expected rate, not quotes. Your appraisal, the expected rate on the day your case number is assigned, your actual closing costs and the financial assessment all move the result.

When the Principal Limit Falls Short of the Payoff

Because 206.32 does not allow any obligation to remain after closing, a shortfall has to be covered, not deferred. There are several honest ways to handle it, and one of them is deciding not to proceed.

• Bring cash to closing. Savings, the sale of an investment or other funds can cover the gap. The lender will need to document where the money comes from.
• Pay the mortgage down first. Extra principal payments over a year or two can close a small gap and lower the payment you are trying to eliminate in the meantime.
• Wait. Principal limit factors rise with age, as the examples show. For a borrower at 63 or 64 who is a little short, a couple of years can be the difference.
• Look at a proprietary loan. A jumbo or proprietary reverse mortgage is not bound by the FHA lending limit, can count value above $1,249,125, and in Oregon can be available from age 55. For a higher-value home with a large balance it sometimes covers what a HECM cannot. It is not FHA-insured, and its terms differ, so compare both side by side.
• Consider whether the house is the right tool. If the gap is large, selling and buying a smaller home with a HECM for Purchase, or simply downsizing, may do more for your budget.

What I will not do is stretch a file to make it close. A loan that just barely pays off the old mortgage and leaves nothing for property taxes and repairs can create the very problem it was meant to solve.

The Seasoning Rule on a Reverse Mortgage to Pay Off Mortgage Liens

HUD does not want a reverse mortgage used to pay off a loan that was taken out recently to pull cash from the home. Under 24 CFR 206.36, a HECM can pay off an existing non-HECM lien if either of these is true:

• the lien has been in place for more than 12 months before the HECM closing, or
• the lien has put $500 or less of cash in the borrower's hands, at its closing or through draws since.

A long-standing purchase mortgage meets the first test easily. The rule matters most for a recent cash-out refinance or a newly opened home equity loan. HUD's 2017 rule added one relief valve for home equity lines of credit: an unseasoned HELOC can still be paid off at closing with your own funds, HECM funds, or a mix, as long as the HECM draw stays within the first-year limit. HUD also explained that loan money paid directly to a contractor for work on the home is not counted as cash to the borrower when the payments are documented.

The practical lesson: if a reverse mortgage is on your horizon, talk with me before opening a new HELOC or doing a cash-out refinance. Borrowing the other way first can delay the reverse mortgage by a year.

What Changes in Your Budget After the Payoff

The month after closing, the mortgage statement stops coming. A few other things change with it, and it helps to plan for them before the first property tax bill arrives.

You pay property taxes and insurance directly. Most forward mortgages collect taxes and insurance through an escrow account. When that loan is paid off, the escrow account closes. Federal servicing rules (12 CFR 1024.34(b)) require the old servicer to return any remaining escrow balance within 20 business days of the payoff. From then on, the tax bill and the insurance renewal come to you. In Deschutes County, paying the full year by the November due date earns a 3 percent discount and paying two-thirds earns 2 percent, according to the county tax office. Setting aside part of the freed-up payment each month is the easiest way to be ready.

A set-aside may handle it for you. If HUD's financial assessment shows a history of late taxes or lapsed insurance, or if you would simply prefer it, the loan can include a life expectancy set-aside that pays those charges from the principal limit. It reduces the money available, and it takes one worry off the table. The reverse mortgage requirements page explains when it is required.

The balance grows instead of shrinking. On your old mortgage, every payment lowered the balance. On a reverse mortgage, interest and the annual mortgage insurance premium of 0.50 percent are added to the balance each month, so it rises. That is the trade you are making for the payment going away. You can still make voluntary payments at any time without penalty under 24 CFR 206.209, and some borrowers keep paying a smaller, optional amount in the early years to slow the growth. The difference is that in a lean month, no payment is required.

To put a number on the benefit: if your current principal and interest payment is $1,400 a month, retiring it frees $16,800 a year. How much of that you keep depends on what the new loan costs to set up and how long you stay in the home, which is why the time horizon matters so much in the section below.

Fixed Rate or Line of Credit for the Payoff

HECMs come in two broad forms. Either one can serve as a reverse mortgage to pay off mortgage balances, but they behave differently afterward.

A fixed-rate HECM is a single lump sum taken at closing, and nothing more can be drawn later (24 CFR 206.25(a)(2)). The same first-year limit applies, so a fixed-rate loan funds the payoff and costs plus up to 10 percent of the principal limit, and any remaining principal limit is simply unavailable. It suits a borrower whose payoff uses most of the principal limit anyway and who values a rate that will not change.

An adjustable-rate HECM can pay off the mortgage and put everything left over into a line of credit, including the portion released after the first twelve months. The unused line grows each month at the loan's interest rate plus the annual mortgage insurance rate. For the borrower in the first example above, that is more than $100,000 of future capacity a fixed-rate loan would have left on the table.

For most payoff clients with room to spare, I lean toward the adjustable loan with a line of credit, because the untouched line is the part that protects them later. When the payoff consumes nearly everything, the fixed rate is often the cleaner choice. Your HUD-approved counselor will walk through both.

Taxes When You Use a Reverse Mortgage to Pay Off Mortgage Debt

Two tax points follow a payoff, and the guide to whether reverse mortgage interest is tax deductible covers both in depth.

First, the annual mortgage interest deduction on your old loan ends, because there is no required payment on the new one and interest that is added to the balance has not been paid. If you were itemizing, that can change your return. Many retired households already take the standard deduction, in which case nothing changes.

Second, paying off a purchase mortgage is the use that most often creates some deductible interest later. IRS Publication 936 treats a refinance of home acquisition debt as acquisition debt up to the old loan's principal balance, so interest on that part may be deductible in the year it is actually paid, usually at payoff, if that year's return itemizes. Keep the payoff statement from closing with your tax records. I am not a tax professional, and your tax advisor should confirm how this applies to you.

Reverse mortgage advances are loan proceeds, not income, so the money used for the payoff is not taxable income. Social Security and Medicare are not affected, though proceeds held past the month they are received can affect means-tested benefits such as SSI and Medicaid.

When Paying Off the Mortgage This Way Is Not the Right Move

Eliminating a payment sounds good to everyone. It is not always the right trade, and these are the situations where I slow the conversation down.

• You expect to move within a few years. The upfront costs, about $25,000 in the example above, are spread over the time you keep the loan. Over three years that is expensive. Over fifteen it is not.
• Your remaining mortgage is small and nearly finished. If you have a low fixed rate and five years left, the cost of a new loan can exceed the payments you would avoid. Sometimes the better answer is to keep paying and use a line of credit for something else later.
• The payoff uses everything. As in the second example, a loan with no cushion left may not protect you from the next large expense.
• The taxes and insurance are already the strain. A reverse mortgage removes the principal and interest payment, not the property charges. If those are the real problem, the honest conversation may be about the size of the house.
• A spouse is under 62, or the heirs want the house itself. Both change the plan and the protections. The guide for adult children is written for the family side of that conversation.

The reverse mortgage pros and cons page covers the broader trade-offs, and the downside of a reverse mortgage takes the costs head on.

Paying Off a Mortgage With a Reverse Mortgage in Bend and Central Oregon

Deschutes County's population is 21.8 percent age 65 and older, and Bend's median home value sits in the mid-$700,000s, so the example above is a realistic Bend household. Many of the clients I meet bought or refinanced during the last decade and are carrying a balance into retirement they did not expect to have. For them, the process of using a reverse mortgage to pay off mortgage debt usually runs like this:

1. A first conversation with your payoff balance and a rough home value, to see whether the payoff fits.
2. HUD counseling with an independent, HUD-approved counselor, required before any HECM application moves forward. The reverse mortgage counseling page explains what to expect.
3. Application, appraisal and the financial assessment, which reviews your credit and your history of paying property taxes and insurance.
4. A payoff statement ordered from your current servicer so the exact figure is known before closing.
5. Closing, followed by the three-business-day right to cancel that applies to a loan refinancing your home. The old mortgage is paid off after that period, and the payment ends.

If you are in Redmond, Sisters, Sunriver or La Pine, the process is the same. The Bend reverse mortgage guide covers the local picture, and how a reverse mortgage works covers the foundation.

Reverse Mortgage to Pay Off Mortgage Debt: Frequently Asked Questions