5-12: PARTIAL PREPAYMENTS (11/18/1994)

© HUD Single Family Housing Policy Handbook 4235.1

A borrower may prepay all or part of the outstanding balance at any time without penalty. However, no prepayment of an amount in excess of the outstanding balance is allowed.

A. A borrower may choose to make a partial prepayment because his or her financial circumstances have improved and he or she wishes to preserve more of the equity in the property. Any change in subsequent payments to the borrower should be made only at the borrower's request. Repayment in full will terminate the loan agreement.
B. A borrower may choose to use a partial prepayment to increase monthly payments. By reducing the outstanding balance, the borrower increases the net principal limit available for calculating monthly payments in accordance with Paragraph 5-8 of this chapter.
Example (cont.): Consider the same 75 year old borrower from the example who needed $5,000 in cash in the 60th month of a tenure payment plan for which no line of credit had been established. The unplanned payment reduced her monthly payments from $591.63 to $551.97. If she were able to make a partial prepayment of $4,550 twelve months later, she could request that her tenure payment be restored to the original amount.
C. A borrower may choose to make a partial prepayment to set up or to increase a line of credit without altering existing monthly payments. By reducing the outstanding balance, the borrower increases the net principal limit. All or part of the increase in the net principal limit may be set aside for a line of credit.
D. A borrower may choose to repay the entire outstanding balance in order to refinance the mortgage with a new reverse mortgage. If the new mortgage is a HECM, the borrower will have to pay a new initial MIP and meet other eligibility criteria. There is no "streamlined" refinancing available for HECMs.