May 21, 2016 by HECM Pro
Can you get out of a reverse mortgage any time you like? The short answer is yes! However, there are a few things you may want to consider before doing so. Unless you’re selling your home, there probably aren’t too many scenarios where it would make sense to pay off a reverse mortgage early.
But before I get into that, let me first go over what a HECM reverse mortgage is. There is a lot of misinformation floating around out there and I want to make sure you’ve got a few basics down.
What is a HECM Reverse Mortgage?
The HECM (which stands for home equity conversion mortgage) reverse mortgage is the most popular reverse mortgage in the United States today. If you know anybody who has a reverse mortgage, it’s very likely the FHA-insured HECM.
The HECM reverse mortgage allows homeowners 62 or older to access a portion of their home’s value and convert it to cash that can be used for just about anything. Borrowers often use the proceeds to eliminate mortgage or other debt payments, supplement income or retirement assets, or do home improvements.
As long as you pay the required property charges (property taxes, homeowner’s insurance, HOA dues, etc.) and live in and maintain the home, no mortgage payments are required. It’s only when the last borrower or non-borrowing spouse permanently leaves the home that the reverse mortgage has to be repaid.
Can You Get Out of a Reverse Mortgage?
Because the HECM is simply a home loan, you can get out of it at any time. You can pay it off with cash on hand or by refinancing into another home loan.
You also can pay off a reverse mortgage by selling your home. Once the home is sold, the reverse mortgage balance is paid off and you walk away with any remaining equity.
There are no prepayment penalties or limitations on repaying the balance in full at any time.
But . . . Why Would You Want To?
So, can you get out of a reverse mortgage? Absolutely! But why would you want to? Unless you’re selling your home, there are probably very few scenarios where it makes sense to pay off the entire balance early. Let me offer some thoughts on paying off early with cash or a refinance:
Using cash on hand to pay off a reverse mortgage: I think this makes very little sense unless you truly have abundant cash reserves. When you’re retired and on fixed income, you have a limited capacity to generate income. It is essential to have the maximum liquid cash reserves possible to finance your lifestyle, cover unexpected expenses, and absorb a rising cost of living. If you’re draining reserves to pay off a reverse mortgage, you’re just converting liquid and usable cash into home equity that is locked away and unusable. Home equity is nice to have, but it can’t be used for anything. You can’t take it down to the store and buy groceries with it, right?
Having said this, let me offer a possible exception: if you have an adjustable-rate HECM, you can structure the loan as a line of credit, which can be borrowed on and repaid at will. If you’re concerned about a large loan balance, it may make sense to pay the line of credit down to a minimal balance. Don’t pay it to zero, however, because you’ll close it out. It doesn’t hurt you to have a large line of credit available in case you need to get your hands on cash. By paying it way down, interest costs are minimal and you still have a large available credit line that can be tapped in a financial emergency.
Even better, the available line of credit earns growth, which causes it to automatically give you access to more equity if you need it.The minimum balance you need to keep the credit line open can vary from one lender to the next, so be sure to call your lender for the exact number.
Refinancing into a traditional home loan: This probably makes zero sense in almost all situations. Why refinance out of a reverse mortgage into a loan with a required monthly payment? If you encounter a financial hardship, you still have to make the payment or the bank comes for your house. It makes more sense to just pay on the reverse mortgage instead. If you run into financial trouble, you can choose not to make a payment if you need to.
If you choose to make payments on a reverse mortgage, note that unpaid fees and interest are paid off before you start paying down the principal.