Refinancing a reverse mortgage may or may not be the best choice for you, depending on a variety of factors. (Getty s).
Homeowners 62 years of age and older may be able to access home equity through reverse mortgages. A reverse mortgage can be refinanced, just like a regular mortgage, and doing so can occasionally make sense.
What Is a Reverse Mortgage?
An older borrower can access their home equity with a reverse mortgage. In contrast to a standard mortgage, which calls for the borrower to pay the lender on a regular basis, a reverse mortgage calls for the lender to pay the borrower on a regular basis.
The loan accrues interest, and principal and interest repayment are postponed until you sell the property, vacate the property, or pass away. Although it can be a useful way to supplement your retirement income, doing this reduces the value of your house.
Types of Reverse Mortgages
A few kinds of reverse mortgages are available:
Home Equity Conversion Mortgages, also known as HECMs, are insured by the Federal Housing Administration. HECM for Purchase mortgages are also available and can help you buy a new home. [
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Similar to HECMs, proprietary reverse mortgages lack the government backing of HECMs.
Single-purpose reverse mortgages are used for one specific purchase.
How a Reverse Mortgage Refinance Works
No matter why you want to refinance your reverse mortgage, it’s helpful to understand what that entails.
According to Chris Downey, president of Harbor Mortgage Solutions, a residential mortgage company in the Boston area, refinancing a reverse mortgage is comparable to refinancing a conventional mortgage.
In essence, you’re switching out your reverse mortgage for a newer, ideally better one. Depending on the refinancing terms, the new loan may have a different interest rate or offer a different monthly payment.
Refinancing a reverse mortgage requires meeting a number of requirements.
According to Downey, a lender would need to demonstrate a very specific benefit before refinancing a client’s reverse mortgage.
The 5-5 rule can be used by homeowners to determine whether refinancing will be advantageous. The National Reverse Mortgage Lenders Association established the following guidelines for refinancing a reverse mortgage:
Additionally, there is a seasoning requirement that homeowners must fulfill, which relates to how long you have had your mortgage. Refinancing must be done at least 18 months after the original reverse mortgage’s closing.
Additionally, the borrower must be eligible for a new reverse mortgage loan. The good news is that when refinancing, the requirements used to determine borrowers’ eligibility for a reverse mortgage might still apply.
For HECMs, borrower requirements include:
The property itself also has to meet FHA requirements. Typically, this entails that the residence must be a single-family home occupied by the owner, free of any hazards to health or safety, and that the owner must have flood insurance in a high-risk area. [.
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For reverse mortgage lenders, a complete financial picture of the borrower is also created using income, assets, living expenses, and credit scores. Additionally, as part of the procedure, borrowers must meet with a reverse mortgage loan counselor.
If you refinance a proprietary reverse mortgage or a non-HECM through a private company, the requirements might change. However, lenders will require you to show that you have sufficient equity to support the new reverse mortgage and that you are financially stable. Due to the limited availability of proprietary reverse mortgages, the majority of reverse mortgages are HECMs.
Should You Refinance a Reverse Mortgage?
In some circumstances, refinancing a reverse mortgage makes sense.
Refinancing your current reverse mortgage may be advantageous for a variety of reasons, according to Vivian Dye, a reverse mortgage consultant with GuardHill Financial Corp. in New York. It may have been several years since you closed, rates may have decreased, or switching from an adjustable rate to a fixed rate makes more sense. Refinancing can increase the amount of money you are eligible to receive from the loan, in case your home’s value has increased and you want to access more equity. “.
Additionally, if you want to add your spouse to the loan because they weren’t on the original loan, refinancing a reverse mortgage might be a good option. In the event that you pass away first or move into a nursing home while your spouse doesn’t, doing this would allow your spouse to continue living in the house and extend income benefits from the reverse mortgage to them.
Of course, reverse mortgage refinancing has some drawbacks. Keep in mind that the mortgage must be repaid to the lender at some point, and that the loan’s interest accrues. Additionally, if your final interest rate is higher than that of your initial loan, you will have a larger loan balance to repay.
Interest. Think about the interest rate environment before choosing a reverse mortgage refinance. According to Dye, homeowners with conventional mortgages should typically only refinance if rates have decreased by at least 2%.
This general rule of thumb captures the trade-off between saving on interest and paying for the new loan, she says. “Most conventional refinances are done to save money on interest payments,” she says.
The same general principle could be used when refinancing a reverse mortgage. Refinancing reverse mortgages or other home loans during an interest rate increase, as they did throughout 2018, could negate any interest savings gains.
Spouse protection. A measure of financial security and comfort can be offered to a couple by refinancing to include a spouse on the loan. Loan distributions cease if the borrower’s spouse passes away or vacates the property. Additionally, widows or widowers who are not listed on the loan documents may be required to repay loans in full immediately, which could necessitate selling the house. To permit a surviving spouse to stay in the house, both spouses must be listed as borrowers on the reverse mortgage.
However, precise rules for HECM loans may allow a surviving spouse to stay in the home even after the borrowing spouse dies or moves out. Consider whether a surviving spouse would be covered under these rules before refinancing just to add him or her to the loan.
Equity access. There are advantages and disadvantages to refinancing to access more of your home’s equity. Having more money in the household to pay for retirement expenses is obviously advantageous. The drawback, however, is a larger balance to repay later. Reverse mortgages typically have to be repaid when the last surviving borrower passes away, though this deadline could be accelerated if the property is no longer the borrower’s primary residence, taxes or insurance are past due, or repairs are required.
Neither the borrower nor the borrower’s heirs will be required to pay more than the home is worth if the reverse mortgage loan balance rises above the property’s value and the house is sold to pay off the loan. If the house sells for at least 95% of the appraised value, the insurance will cover any shortfall.
Loan fees. Closing costs and other fees must typically be paid when refinancing a reverse mortgage.
Depending on the lender, refinancing might mean paying:
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Plan for these fees well in advance because they can easily increase the cost of a refinance by several thousand dollars.
As with most refinances, Downey says, “the advantages must obviously outweigh these costs.”
Reverse Mortgage Refinance Alternatives
Borrowers may choose to refinance into a conventional mortgage rather than a new reverse mortgage.
If the borrower can no longer live in the house but does not want to sell it or if the heirs are concerned about being able to pay back the reverse mortgage, this may make sense. Another option is for borrowers to decide they no longer require the income a reverse mortgage provides.
Of course, switching to a conventional loan entails paying the mortgage on a regular basis as opposed to receiving payments as with a reverse mortgage. Additionally, borrowers would still have to take into account the same interest rate and closing cost factors. It’s crucial to take into account the upfront costs of switching to a conventional loan that appear before and after refinancing.
Modifying your reverse mortgage’s payment terms is one alternative to refinancing. For instance, borrowers with HECM loans have the option of receiving monthly payments for the rest of their lives, monthly payments for a set period of time, a line of credit, or a combination of monthly payments and a line of credit.
If a borrower switches from a line of credit to monthly payments for a life term, a modification may increase the payout. However, this would not change the loan’s interest rate or the total amount of equity the borrower could access. You would have to refinance for either of those conditions to change.
Maybe you’ve compared your options and decided that refinancing your reverse mortgage is your best course of action. Ultimately, a reverse mortgage refinancing decision is a numbers game. However, the choice also depends on the benefits you anticipate from refinancing, such as interest cost savings, increased retirement income, or something else.
According to Downey, the only way a homeowner can determine whether refinancing a reverse mortgage makes sense is to first determine their goals and objectives. “Each person’s needs, financial situation, and/or health issues will ultimately determine the best course of action for them to take. “.
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FAQ
Is it a good idea to refinance my reverse mortgage?
If your home’s value has increased or your financial situation has changed since you took out your loan, refinancing your reverse mortgage might be a good idea. You might be able to get a better deal now than you did previously because loan limits and interest rates are constantly changing.
How much equity do you need to refinance a reverse mortgage?
The precise amount of equity required for a reverse mortgage varies depending on the lender and the type, but as a general guideline, you should have at least 50% equity in your home.
How long before you can refinance a reverse mortgage?
Refinancing must be done at least 18 months after the original reverse mortgage’s closing. Additionally, the borrower must be eligible for a new reverse mortgage loan. The good news is that when refinancing, the requirements used to determine borrowers’ eligibility for a reverse mortgage might still apply.
Can an heir refinance a reverse mortgage?
After receiving a property as an inheritance, you may be able to refinance a reverse mortgage. However, you’ll have to do so by securing a conventional mortgage, for which you must be eligible.