Should You Refinance Your Reverse Mortgage? A Complete Guide

Reverse mortgages allow senior homeowners to tap into their home equity without having to make monthly payments. With a reverse mortgage, the lender pays you, rather than you paying the lender. However, these complex loans come with pros and cons. One question on many seniors’ minds is: can you refinance a reverse mortgage? Let’s explore whether refinancing makes sense.

What is a Reverse Mortgage?

First, a quick refresher on how reverse mortgages work. These loans are available to homeowners aged 62 and older. To qualify, you must live in the home as your primary residence.

With a reverse mortgage, you borrow against the equity in your home. The equity is the difference between what your home is worth and what you owe on your mortgage. For example, if your home is valued at $300,000 and you have a $100,000 mortgage, your equity would be $200,000.

The loan proceeds from a reverse mortgage are first used to pay off any existing mortgages The remaining funds can be taken as a lump sum, monthly payments, a line of credit, or a combination You don’t have to repay the loan as long as you live in the home.

When you pass away, sell, or move out of the home, the loan becomes due. At that time, you or your heirs can either repay the loan or the home can be sold to cover the loan balance.

Who Offers Reverse Mortgages?

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM) These are insured by the Federal Housing Administration (FHA) Most major lenders offer HECMs.

You can also get jumbo or proprietary reverse mortgages. These are offered by private lenders and have higher lending limits than HECMs.

Can You Refinance a Reverse Mortgage?

Yes, it is possible to refinance a reverse mortgage. As with traditional mortgages, you may want to refinance your reverse mortgage to get a lower interest rate, adjust your loan terms, or get cash from your new loan amount.

However, refinancing a reverse mortgage is more complicated than refinancing a forward mortgage. Here are some key considerations.

You Must Have Sufficient Equity

To qualify for a refinance, you’ll need to have enough equity available in your home. Remember, your equity decreases over time as you receive payouts from your original reverse mortgage.

Additionally, because home values fluctuate, you may have less equity now compared to when you first took out the loan. You’ll need to get a new appraisal to determine your current loan-to-value ratio.

Closing Costs Apply

As with standard mortgages, you’ll have to pay closing costs to refinance your reverse mortgage. Closing costs typically range from 2% to 6% of the total loan amount. This covers lender fees, appraisal fees, and other charges.

If you don’t have cash on hand, you can roll closing costs into your new loan amount. But this will decrease the funds available to you.

Your Loan Balance Will Change

When you refinance, you’ll pay off your old reverse mortgage and replace it with a new one. This resets your loan balance, fees, and available equity.

Your new balance will depend on current interest rates, your home value, and your remaining equity. In some cases, refinancing can actually increase your total loan amount and associated fees. Run the numbers carefully beforehand.

You Might Get Hit With Prepayment Penalties

Some reverse mortgage lenders charge prepayment penalties if you refinance within the first few years of the loan. Make sure you understand any fees you may incur by refinancing before moving forward.

You’ll Start A New Loan Term

Refinancing a reverse mortgage restarts your loan term at year one. This gives you access to more equity, but it also shortens the duration you can remain in the home.

If you refinance too early, you could run through all your equity before reaching the end of your life. This risks having to sell your home to repay the loan.

HECM Refinances Have Restrictions

For HECMs, FHA rules restrict refinancing in the first 12 months of the loan. You can refinance an existing HECM after 12 months, but only into a new HECM. The FHA won’t insure a HECM refinanced into a proprietary reverse mortgage until after five years.

These restrictions aim to protect seniors from being taken advantage of via “churning” schemes. But the rules do limit refinancing options for HECM borrowers.

Refinancing Into a Forward Mortgage Is Difficult

You can refinance a reverse mortgage into a traditional “forward” mortgage where you make payments instead of receiving payouts. But most borrowers don’t qualify for this switch.

That’s because you’ll need income and credit to qualify for a standard mortgage. The reason many seniors use reverse mortgages in the first place is that they lack sufficient income for regular loan payments.

When Does Refinancing a Reverse Mortgage Make Sense?

Refinancing a reverse mortgage can be advantageous in certain situations:

• Interest rates dropped – If rates decreased significantly since you originated your loan, refinancing could secure you a lower rate. This minimizes interest costs over the loan term.

• Home value increased – If your home appreciated in value, a refi provides access to additional equity. You can receive higher payouts.

• Need a line of credit – If you took a lump sum but now want a line of credit, refinancing lets you change your payout plan.

• Prevent foreclosure – If falling behind on taxes or insurance puts your loan at risk, a refi with lower payments may prevent foreclosure.

• Divorce – If you must remove a spouse from title after a divorce, refinancing with only one borrower may allow you to keep the home.

• New proprietary loan features – Refinancing from a HECM to a proprietary reverse mortgage opens up jumbo loan amounts and other benefits.

Tips for Refinancing a Reverse Mortgage

If you decide to refinance your reverse mortgage, keep these tips in mind:

• Shop multiple lenders and compare costs and rates. Understand all fees involved.

• Consider both HECM and jumbo loans to see which works best.

• Select a tenured monthly payout plan to sustain payments as long as needed.

• Take only what you need to minimize interest costs and preserve equity.

• Review if repayment risks changed since you originally took out the loan.

• Consult a financial advisor or attorney experienced with reverse mortgages.

Alternatives to Refinancing a Reverse Mortgage

For some borrowers, refinancing a reverse mortgage may not make good financial sense. Here are a few alternatives to consider:

Do Nothing

If your current loan meets your needs, continuing with its terms as is may be the simplest option. No action is required on your part.

Recast the Loan

Some lenders let you recast your reverse mortgage rather than refinance it. This resets the principal balance without issuing an entirely new loan.

It provides some benefits of refinancing without all the costs. Loan recasting may enable you to adjust your payout plan as needed.

Borrow Against Home Equity

Instead of refinancing your reverse mortgage, you could take out a new home equity loan or line of credit. This leaves your reverse mortgage intact while giving you access to additional funds.

However, you’ll be making payments on the home equity loan each month. Make sure you can afford the additional debt.

Downsize Your Home

If cash flow is a concern but you have equity available, you could downsize to a less expensive home. This reduces your monthly costs.

You can use equity from the sale of your current home to purchase a lower-priced property. Then get a new reverse mortgage on the smaller home.

Discuss Options with Family

If you’re struggling to pay bills with your reverse mortgage payouts, family members may be willing to help. Perhaps they can assist with taxes, insurance, or maintenance costs.

This keeps you in your home without needing to refinance and incur more fees. Make sure to involve your family in big financial decisions.

Key Takeaways on Reverse Mortgage Refinancing

Refinancing a reverse mortgage allows you to adjust your loan terms and interest rate. But make sure it makes sense by considering:

• Your remaining home equity
• Closing costs and prepayment penalties
• How your loan balance and payments will change
• FHA rules if you have a HECM
• Your overall retirement finance needs

Thoroughly discuss options with lenders, a housing counselor, and family members before moving forward. Refinancing should provide a clear benefit, not just accumulate more fees and debt.

With smart decision-making, you can determine if refinancing your reverse mortgage aligns with your personal situation. This ensures