Eliminating Your Monthly Mortgage Payment
One of the most popular uses of a HECM reverse mortgage is paying off an existing traditional mortgage. This eliminates the monthly mortgage payment and frees up cash for other retirement needs. Here's how the process works.
How It Works
When you close on a reverse mortgage, any existing mortgage balance on your home is paid off first from your HECM proceeds. This is considered a "mandatory obligation" — meaning it takes priority over other disbursements. The remaining proceeds, after paying closing costs and other mandatory obligations, are available to you.
Impact on Your Cash Flow
Eliminating a monthly mortgage payment can dramatically improve your monthly cash flow. For example, if you're currently paying $1,500 per month on your mortgage, a reverse mortgage puts that $1,500 back in your pocket every month — over $18,000 per year. This can make a significant difference in your quality of life.
What You Need to Qualify
To be eligible, you need sufficient equity in your home. Your principal limit (the amount you can borrow) must be enough to pay off your existing mortgage balance plus closing costs. If your current mortgage balance is too high relative to your home's value and your age, you may not have enough proceeds to complete the payoff.
The Break-Even Analysis
Your advisor should provide a break-even analysis comparing the cost of the reverse mortgage against the monthly payment savings. In many cases, the cumulative payment savings exceed the costs within the first few years, making the reverse mortgage a financially sound decision.
Remaining Proceeds
After your existing mortgage is paid off, any remaining proceeds are yours to access according to the disbursement plan you chose. With an adjustable-rate HECM, you can receive remaining funds as a line of credit, monthly payments, or a combination. With a fixed-rate HECM, you receive remaining available funds as a lump sum.
A Word of Caution
Remember that while you no longer have a monthly mortgage payment, you still must pay property taxes, homeowners insurance, and maintain the home. Factor these ongoing costs into your financial planning.
