Reverse Mortgage With an Existing Mortgage

What a Reverse Mortgage Is and How It Works

A reverse mortgage is a loan against the value built up in a home, called equity, that does not require monthly mortgage payments to the lender. The CFPB explains that title stays in the homeowner's name, and that interest and fees are added to the loan balance each month, so the balance grows.

The federally insured version is the Home Equity Conversion Mortgage, or HECM. HUD says the HECM is the only reverse mortgage insured by the federal government and is available only through a lender approved by the Federal Housing Administration (FHA).

Federal law sets the age floor. Under 12 U.S.C. § 1715z-20(b) and (d), an eligible "elderly homeowner" is one who is, or whose spouse is, at least 62. HUD's regulation, 24 C.F.R. § 206.33, adds: "The youngest borrower shall be 62 years of age or older at the time of loan closing."

The loan is still debt, not income or a benefit. The borrower must keep living in the home as a principal residence, pay property taxes and homeowners insurance, and keep the house in good condition. A HECM generally comes due when the last surviving borrower or Eligible Non-Borrowing Spouse dies, sells the home, or no longer lives there as a principal residence. For a fuller walk-through, see how a reverse mortgage works.

Why the Existing Mortgage Must Be Paid Off at Closing

The reason the old loan must go comes down to a single idea: lien position. A lien is a lender's legal claim on the home. The "first lien" belongs to the lender that gets paid first if the home is sold.

Federal law defines a HECM as a first mortgage. Under 12 U.S.C. § 1715z-20(b)(3), a home equity conversion mortgage "means a first mortgage which provides for future payments to the homeowner based on accumulated equity." Two loans cannot both hold first place, so a regular mortgage already sitting in that spot must be discharged at or before closing.

HUD's rules also look past closing day. Under 24 C.F.R. § 206.32, the borrower must show the lender that, after the first payment of loan proceeds, there will be no outstanding obligations from the transaction, except for permitted servicing charges and any future repair set-aside.

In practice, the lender uses part of the reverse mortgage to pay the old lender at closing. If that portion falls short of the payoff, the borrower brings cash to closing to close the gap. Homeowners who are retiring with a mortgage still owed often find this payoff step is where the numbers matter most.

How Equity and the Loan Amount Are Related

Whether a remaining balance creates a problem depends on how much the reverse mortgage can provide. That figure is called the principal limit: the most a borrower may access under the loan.

The CFPB says the principal limit depends on age, the interest rate and the home's value. In general, older borrowers, higher-priced homes and lower rates mean higher limits. With a co-borrower or Eligible Non-Borrowing Spouse, the youngest person's age is used.

Home value is counted only up to a ceiling. HUD uses the lesser of the appraised value, the HECM FHA mortgage limit, or the sales price. That limit, called the maximum claim amount, is updated periodically, and HUD publishes the current figure in a mortgagee letter on HECM limits.

The existing mortgage comes out of the principal limit first. As a hypothetical illustration, if a home's principal limit and the old balance were nearly equal, little would remain after payoff. If the old balance were larger, the borrower would need other funds. Closing costs matter too: federal rules limit the origination fee, it may be fully financed into the loan, and the lender discloses it.

Your Wider Financial Picture Beyond the Payoff

Clearing the old balance is only one part of whether a reverse mortgage works for a household with a mortgage still owed. Removing the monthly mortgage payment does not remove every housing cost. Property taxes, homeowners insurance and upkeep stay with the borrower for the life of the loan, and keeping up with them is a condition of staying in good standing. A household whose budget is already stretched by the existing mortgage may find that these continuing costs carry as much weight as the payoff itself.

That wider picture is part of the required counseling. The CFPB describes HECM counseling as covering the borrower's eligibility, the financial implications of the loan and other alternatives. A HUD-approved counselor can work through a household's own numbers. HUD lists counselors on its HECM Counselor Roster and by phone at (800) 569-4287.

Ongoing Obligations After Closing

Keeping a reverse mortgage in good standing depends on what happens after the papers are signed. Under 24 C.F.R. § 206.39, the home must be each borrower's principal residence at closing, and it has to stay that way.

Under 24 C.F.R. § 206.27(c), the loan can become due, with HUD's approval, if the home stops being a borrower's principal residence for reasons other than death and no other borrower lives there; if a borrower is away for more than 12 consecutive months because of physical or mental illness and no other borrower lives there; if property charges are not paid; or if another obligation under the mortgage is not met.

For families, the practical meaning is steady upkeep: property taxes, homeowners insurance and maintenance remain the borrower's job. Falling behind can lead the lender to call the loan due. Meanwhile the balance keeps growing as interest and fees are added.

A spouse not on the loan may be protected. Under 24 C.F.R. § 206.55, an Eligible Non-Borrowing Spouse who was married to the borrower at closing, was named in the loan documents and lives in the home can have repayment deferred after the borrower dies, if conditions are met, including establishing a legal right to remain within 90 days.

When the loan comes due, it is typically repaid by selling the home. The HECM is non-recourse: under 12 U.S.C. § 1715z-20(d)(7), the homeowner is not liable for any shortfall between the debt and what the lender recovers from the net sale proceeds or federal insurance.

Other Options Worth Knowing About

Before deciding on any loan, it helps to see the whole field. Federal law requires HECM counselors to discuss options other than a HECM, and the CFPB names several, including those below.

• A home equity loan or line of credit. These borrow against equity with monthly payments; a reverse mortgage vs HELOC comparison shows how the balances move in opposite directions.
• A cash-out refinance. A new, larger mortgage replaces the old one, which brings new monthly payments.
• Selling and downsizing. This frees equity and can cut costs, but means leaving the home.
• Property tax relief and benefit programs. The CFPB notes that many localities have property tax programs, and points to the county or town tax office for details.
• Help from family. Relatives may help with payments or costs, which carries its own understandings.
• Lowering expenses or waiting. Time and a tighter budget can change what makes sense.

Which option fits depends on the household's income, health, plans and how long they hope to stay. Counseling from a HUD-approved counselor is required before a HECM closes, and the counselor must be independent of the lender under 12 U.S.C. § 1715z-20(d)(2)(B). The FTC adds that no one has to buy other financial products to get a reverse mortgage. Owners of a paid-off house face a different starting point.