A reverse mortgage when you still owe on the house
What happens to a mortgage you still owe when a HECM closes, and how much cash is left for you depending on the size of that debt.
Cash available in the first 12 months
$18,650
Obligations take 73 % of the principal limit: you get them + 10 %.
| Principal limit | $186,500 |
| 60 % of it (line 17) | $111,900 |
| Obligations + 10 % (line 18) | $154,650 |
| Greater of the two (line 19) | $154,650 |
| Mandatory obligations | $136,000 |
| Initial disbursement limit | $154,650 |
| Available after month 12 | $31,850 |
Worked out by Radif Partners · How we calculate · factors read on hud.gov · not a loan offer
A HECM pays off the mortgage you still owe on the day it closes: the payoff goes on line 5 of HUD's payment plan, counts as a mandatory obligation and comes out of the principal limit before you receive anything. Once obligations pass half of the principal limit, the first-year limit becomes those obligations plus 10 % of it, and if they exceed the whole principal limit, you bring the difference in cash. At 68, with a $500,000 home and an expected rate of 6.65 %, the principal limit is $186,500 and the upfront mortgage insurance (MIP) plus the maximum origination fee take $16,000. With no mortgage, $95,900 is available in year one. A $100,000 mortgage leaves $18,650 in year one and $51,850 after it. A $190,000 mortgage exceeds what the loan can pay, and $19,500 is due at closing. Once the payoff is made, no monthly mortgage payment remains.
Cash left for you, by size of the mortgage
The table runs one home through HUD's payment plan with eight sizes of remaining mortgage. Everything else stays fixed: age 68, a $500,000 appraisal, an expected rate of 6.65 % (10-year Treasury at 5.15 % plus an example margin of 1.5 %), $10,000 of upfront MIP and $6,000 of origination fee.
| Mortgage to pay off | Obligations | Share of principal limit | Cash in year one | Opens after month 12 | Cash due at closing |
|---|---|---|---|---|---|
| $0 | $16,000 | 9 % | $95,900 | $74,600 | $0 |
| $40,000 | $56,000 | 30 % | $55,900 | $74,600 | $0 |
| $80,000 | $96,000 | 51 % | $18,650 | $71,850 | $0 |
| $100,000 | $116,000 | 62 % | $18,650 | $51,850 | $0 |
| $130,000 | $146,000 | 78 % | $18,650 | $21,850 | $0 |
| $160,000 | $176,000 | 94 % | $10,500 | $0 | $0 |
| $190,000 | $206,000 | 110 % | $0 | $0 | $19,500 |
| $220,000 | $236,000 | 127 % | $0 | $0 | $49,500 |
The table has four zones. Up to a mortgage of about $77,250, the obligations stay under half of the principal limit: year-one cash is 60 % of the principal limit minus the obligations, so each dollar of debt removes a dollar of year-one cash and nothing from what opens later. Between $77,250 and about $151,850, year-one cash is stuck at $18,650, the extra 10 %, and the debt eats into what opens later. From there to $170,500, the obligations plus 10 % would pass the principal limit itself, so year-one cash is only what the principal limit leaves after the obligations. Above $170,500, the HECM cannot cover the payoff and costs, and the excess is due in cash.
Enter what you still owe
Cash available in the first 12 months
$18,650
| Principal limit | $186,500 |
| 60 % of it (line 17) | $111,900 |
| Obligations + 10 % (line 18) | $179,650 |
| Greater of the two (line 19) | $179,650 |
Line 5: the payoff is part of the loan
HUD's payment plan form, the one signed at closing, lists the mandatory obligations from line 3 to line 9. Line 5, "Discharge of Liens", takes "the amount of any existing liens on the property that meet FHA seasoning regulations and requirements and will be paid-in-full at closing from HECM funds" (HUD payment plan form). The regulation names the same item among mandatory obligations: "amounts required to discharge any existing liens on the property" (24 CFR 206.25(b)(8)).
Because it is a mandatory obligation, the payoff is financed by the HECM and joins the balance from day one, with interest and the 0.5 % annual MIP. In the $100,000 case, the HECM starts with a balance of $116,000, payoff and costs together; left alone at today's note rate of 5.99 %, it would reach $221,593 after ten years. The old monthly payment disappears, and the debt is carried forward instead.
The 50 % threshold and the extra 10 %
The initial disbursement limit is the lesser of two amounts: the greater of 60 % of the principal limit or the obligations plus 10 % of it, and the principal limit minus later set-asides (24 CFR 206.25(a)). HUD's Handbook makes the second branch available "when Mandatory Obligations exceed 50 percent of the Principal Limit" (Handbook 4000.1). On the form, line 2 records how much of that extra 10 % you take.
In the $100,000 case, obligations reach $116,000, 62 % of the principal limit. 60 % of the principal limit would be $111,900; obligations plus 10 % give $134,650, the larger figure, so the limit is $134,650. After the payoff and the costs, $18,650 is left to draw in year one, and $51,850 more from month 13.
When the debt is larger than the principal limit
A HECM can never pay out more than its principal limit. If the payoff and the costs are larger, the Handbook says the lender "must ensure the Borrower brings funds to closing to satisfy all obligations in excess of the Initial Disbursement Limit". Line 11 of the form, "Cash from Borrower", records that amount. With a $190,000 mortgage, obligations of $206,000 exceed the $186,500 principal limit: $19,500 has to come from savings, a family member or the sale of something else. No cash comes out of the HECM in that case: the whole principal limit is used on the first day.
24 CFR 206.32 adds that, once the initial payment is made, no obligation incurred in connection with the HECM transaction may remain outstanding, apart from servicing charges and a repair set-aside. A larger home value, an older youngest borrower or a lower expected rate each raise the principal limit; the factor table shows by how much.
How old the old loan must be
A lien taken shortly before the HECM cannot always be paid with HECM money. Federal rules allow the payoff when the lien has been in place more than 12 months before closing or gave the borrower $500 or less in cash (24 CFR 206.36). The Handbook adds a third case: a lien of 12 months or less whose money went only to repairs required to meet FHA property standards, documented by invoices or canceled checks. A home equity line that fails the test may still be paid off with your own funds, HECM funds or both, provided the first-year limit stays at or under 60 % of the principal limit.
After closing, the home must be kept, insured and its taxes paid, since missing those charges can make the loan due (24 CFR 206.27(c)). The first-year limit page covers the other obligations, the HECM and HELOC comparison sets the two kinds of credit line side by side, and the full calculator accepts your payoff figure.