Should You Pay Off A Reverse Mortgage?

by Peter G. Miller
January 19th, 2009

We usually think of reverse mortgages as debt that will never be repaid, but that is not necessarily the case.

For instance, the Los Angeles Times reports that one couple with a $62,000 reverse mortgage is seeking to reduce the debt if not pay it off.

While reverse mortgages are sometimes thought of as financing which will never be repaid by the borrowers, that’s not necessarily the case. There’s no reason why borrowers so inclined cannot repay the debt.

But would any borrowers be inclined?

Actually, there may well be good reasons to repay a reverse mortgage. For instance, imagine that you have a reverse mortgage line of credit. You tap into it now and again when cash is needed, but the actual debt is not large relative to your income and assets. It can then make sense to pay off the outstanding balance to remove claims against your property and estate.

In other words, just like a “forward” home equity line of credit (HELOC) there is no reason why a reverse mortgage can’t be obtained with the expectation of repayment.

To some extent the reverse mortgage line of credit may be a “better” deal when compared with a forward HELOC in the sense that a monthly repayment is not required. However, this needs to be carefully thought out because not making a payment means that the size of the reverse mortgage debt will grow as interest is added to the amount outstanding.

Another advantage with the reverse mortgage line of credit is that such an extension of financing is not based on your income or employment. Instead you need to be age 62 and above and you need to have equity in your prime residence to support the loan. That’s about it because reverse mortgage “qualifying” is less about borrowers and more about asset values.

There are, however, several caveats:

___ A reverse mortgage is debt.

___ There are up-front fees to be paid when setting up a reverse mortgage.

___ The size of the debt will grow if payments are not made.

___ Not making payments can be attractive in terms of holding down cash costs.

___ While you may plan on paying down or paying off your reverse mortgage, plans can change.

___ There is no “penalty” in the form of foreclosure or dinged credit if you don’t pay back a reverse mortgage on a monthly basis or with an occasional payment — you have a right with reverse financing not to make payments, that’s part of the way such loans are engineered.

As with any decision regarding reverse mortgages, first speak with an attorney who specializes in elder law or a fee-only financial planner who is familiar with senior issues. Also ask trusted family and friends.

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2 Responses to “Should You Pay Off A Reverse Mortgage?”

  1. Jim Says:

    Fundamentally your article is flawed. Why pay off a HECM especially an adjustable rate (AR) HECM? Why not pay it down to a very low amount like $10? Yes, there is a monthly servicing fee but how many months will it take to excced the costs of taking out a new HECM?

    I am a strong proponent to paying down AR HECMs but to do in a well reasoned manner. For example, what about the tax year when the interest is paid. Is that a good income year for offset purposes? If all years are the same why pay it down so as to maximize the income tax benefits.

    Why is a fee-only financial planner a good adviser on HECM paydowns? If his/her advice is worthwhile it is usually on investments not other financial matters. A fee based CFP might be a much better choice.

    Too much write and too little space.

    James E. Veale, CPA, MBT

  2. Reverse Mortgages, Insurance, and Taxes | Reverse Mortgage Guide Says:

    [...] the money borrowed until they move or die. But there are some circumstances that can result in you paying off a reverse mortgage [...]