Everything You Need to Know About Refinancing a Reverse Mortgage

A reverse mortgage allows senior homeowners to tap into their home equity without having to make monthly mortgage payments With a reverse mortgage, you receive funds from the lender either as a lump sum, monthly payouts, or a line of credit The loan comes due when you pass away, sell the home, or move out permanently.

At that point, you or your heirs can either repay the loan or sell the home to cover the reverse mortgage balance. Many seniors use reverse mortgages to supplement retirement income or pay for healthcare costs.

But what happens if you want to refinance an existing reverse mortgage loan? Is it possible to get a new, lower interest rate or cash out more equity?

In this comprehensive guide, we will cover

• The basics of reverse mortgage refinancing
• Requirements to qualify for a reverse mortgage refinance
• Pros and cons of reverse mortgage refinancing
• Steps in the refinance process
• Alternatives to refinancing a reverse mortgage

Let’s get started!

Overview of Refinancing a Reverse Mortgage

Yes, it is possible to refinance an existing reverse mortgage loan. Refinancing lets you replace your current reverse mortgage with a new loan that may offer better terms.

Reasons to consider refinancing include:

• Interest rates have dropped, so you can get a lower rate
• You want to change lenders
• You need to cash out additional home equity

However, refinancing reverse mortgages is less common than refinancing traditional “forward” mortgages. Relatively few borrowers refinance their reverse mortgages each year compared to forward mortgages.

There are also more restrictions around refinancing reverse mortgages. So before deciding if it makes sense to refinance, it’s important to understand the specific reverse mortgage refinancing requirements.

Reverse Mortgage Refinancing Requirements

To qualify for a refinance of your reverse mortgage loan, you must meet the following requirements:

Age 62 or Older

All reverse mortgage programs require borrowers to be at least 62 years old. This age eligibility applies whether you are getting an original reverse mortgage or refinancing a reverse mortgage.

Primary Residence

The home securing the reverse mortgage refinance must be your primary residence. Second homes or investment properties are not eligible.

Sufficient Home Equity

You can only tap into your available home equity with a reverse mortgage. Therefore, you need to have enough equity remaining in your home to make refinancing worthwhile.

In the early years of your reverse mortgage, your equity may be limited as the loan balance grows over time. But if your home has appreciated in value, refinancing later on may allow you to access additional equity.

Waiting Period After Original Loan

FHA reverse mortgages carry a waiting period before you can refinance, which depends on when you obtained your original reverse mortgage:

• Past 12 months – You cannot refinance within the first year after getting your existing reverse mortgage.

• Years 2-5 – In the second through fifth years, you can refinance but will incur an “early termination” fee equal to 2% of your loan balance.

• After Year 5 – If it has been more than five years since you originated your reverse mortgage, you can refinance with no penalty.

This waiting period aims to discourage seniors from continually refinancing their reverse mortgages to cash out equity. Make sure the savings from refinancing will outweigh any applicable fees.

The Pros and Cons of Reverse Mortgage Refinancing

Before deciding if refinancing makes sense for your situation, weigh the potential advantages and disadvantages:

Potential Advantages

Lower Interest Rate – If current rates are at least 2% below your existing rate, refinancing can reduce your total interest costs over the life of the loan.

Cash Out More Equity – If your home value has grown, you may be able to take out more of your equity via a refinance.

Change Lenders – You can find a new lender if you are unhappy with your current reverse mortgage company.

End Annuity Payments – Refinancing can help if you no longer need annuity payments from your original reverse mortgage.

Lower Costs – Closing costs may be lower now compared to when you originally took out the reverse mortgage.

Potential Disadvantages

Fees and Costs – Refinancing involves closing costs and lender fees. And if you refinance too soon, you’ll incur early termination penalties.

Interest Rate May Increase – There is no guarantee refinancing will get you a lower rate. Rates fluctuate and may be higher now.

Less Equity Available Later – Tapping more equity today leaves less remaining for later in retirement if needed.

Loan Balance Will Grow Faster – Refinancing to a higher loan amount means your balance due will grow at a faster rate.

To decide if reverse mortgage refinancing still makes sense, crunch the numbers to see if potential savings outweigh the costs.

Steps in the Reverse Mortgage Refinance Process

If you determine it makes financial sense to move forward with refinancing your reverse mortgage, follow these key steps:

1. Check eligibility. Confirm you meet all the age, residency, home value and waiting period requirements.

2. Compare new interest rates. See if current rates are lower than your existing reverse mortgage rate.

3. Calculate costs. Add up all expected closing costs, lender fees, and any early termination penalties that apply to your situation.

4. Determine new loan amount. Figure out how much additional equity you want to cash out, if any.

5. Select a lender. Shop different reverse mortgage lenders to find the best rate and terms.

6. Complete the application. Provide updated financial and property documents to your chosen lender.

7. Close on your refinance. Review final loan documents. Then sign to finish the reverse mortgage refinancing process.

Be sure to consult a financial advisor or housing counselor if you need help weighing whether refinancing makes sense for your personal financial situation.

Alternatives to Refinancing a Reverse Mortgage

Some alternatives to refinancing your reverse mortgage to consider include:

Recast the loan: If interest rates have dropped only slightly, you may be able to modify your existing reverse mortgage loan to a lower rate through a “recast.” This avoids refinance costs.

Take a home equity loan: Consider a HELOC or second mortgage to access equity without refinancing your reverse mortgage.

Sell and downsize: If you no longer need your current home, selling and downsizing can eliminate your reverse mortgage balance and provide cash from home sale proceeds.

Pause payments: If money is tight, you may be able to pause reverse mortgage payments for a short time rather than refinancing to cash out all your equity.

Is Refinancing Your Reverse Mortgage Right for You?

Reverse mortgage refinancing is a big decision that involves weighing many factors – equity needs, costs, loan terms, interest rates, and fees. With proper planning and strategic use, a reverse mortgage refinance can provide seniors with greater financial flexibility.

But refinancing also comes with limitations and is not right for everyone. By understanding requirements, crunching numbers, and exploring alternatives, you can decide if refinancing your reverse mortgage aligns with your retirement goals.