The basics of refinancing a reverse mortgage
Many homeowners refinance their conventional mortgages to lower their monthly payments or tap into their home equity. Did you know you can also refinance a reverse mortgage?
The Federal Housing Administration (FHA) allows homeowners to refinance their reverse mortgage if there is a tangible benefit to do so. When you refinance, you replace your existing reverse mortgage with a new agreement using new terms, rates and guidelines. Some of the proceeds from the new reverse mortgage will have to pay off the loan proceeds and interest accrued from the original contract.
A way to increase your principal limit
The most logical reason to refinance a reverse mortgage is the ability to access a larger loan amount.
In any reverse mortgage, the amount available to the borrower is based on three factors:
- The borrower’s age—the older you are, the more you can borrow
- The amount of equity in the home—the greater the value, the more you can borrow
- The expected interest rate—the lower market rates are, the more you can borrow
If you’re refinancing an existing reverse mortgage, you will obviously be older than what you were when you originally obtained the loan. Since age factors considerably on how much you can borrow, your new, older age will help increase your loan limit.
Since your home’s value also plays a role in how much you can borrow, significant appreciation could enable you to increase the amount of loaned funds available. This is especially true if you obtained a reverse mortgage shortly after the housing crisis in 2008, since the value of your home at the time was likely much lower than it was prior to the market decline or since. Property values have rebounded in many areas, some stronger than others.
FHA lending limits have also increased in some areas since 2008. For years the FHA lending limit differed by county. In 2008, a national lending limit of $417,000 was imposed; today it’s $625,500. If your current reverse mortgage was based on lower home value limits and you have a home valued in that $600,000 range, you may have more reverse mortgage funds available to you by refinancing.
Finally, you may have a larger principal amount available to you with a refinance if interest rates are lower now than when you obtained the reverse mortgage. In the current low-rate environment, this probably only applies to borrowers who have had a reverse mortgage in place for a number of years.
Make sure it’s financially beneficial
The main downside to refinancing a reverse mortgage is similar to that of a traditional mortgage: the fees and closing costs associated with the transaction.
Just like with the refinancing of a standard mortgage, there should be a financial justification for you, personally, to refinance your reverse mortgage. Don’t assume that just because interest rates are lower and other people are taking advantage that it’s the right move for your situation.
The easiest way to determine whether a refinance is financially beneficial is to compare the cost of refinancing with the increase in the principal limit you would obtain. The larger the gap, the more advantageous it is to refinance. If, on the other hand, you’ll pay $7,000 in fees and closing costs for a $10,000 increase in your principal limit, refinancing your reverse mortgage probably isn’t the best option.
If you’re refinancing an HECM, federal law requires that the lender provide an estimate of the total cost of refinancing, including the fees and closing costs. In addition, the lender has to provide an estimate of how much more the borrower’s principal limit will be by refinancing. The comparison is based on the new principal limit minus the remaining amount of funds the borrower can access from the current reverse mortgage contract.
Besides an increased principal limit, there are other reasons to consider a reverse mortgage refinance.
You want to add your spouse to the reverse mortgage. This may be a situation where your spouse wasn’t 62 years of age when you obtained the reverse mortgage or you have married since obtaining the loan.
Keep in mind that if you married since the time of your previous reverse mortgage and your new spouse is younger than you, it will negatively impact your new principal limit if you refinance. In a situation where co-borrowers are applying for a reverse mortgage, the availability of funds is based on the age of the youngest borrower or eligible non-borrowing spouse.
That means if you are, say, 75 years old, and you recently married a 62-year-old, it will be your spouse’s age that will determine the principal amount.
Another reason you may want to consider a reverse mortgage refinance is to switch from an adjustable to a fixed-rate loan or vice versa. People who entered the reverse mortgage market many years ago may not have had the option of obtaining a fixed-rate reverse mortgage. Keep in mind you can only receive the proceeds in a lump sum if opting for a fixed-rate reverse mortgage. No other payment options, such as a line of credit or monthly payment, are available with a fixed-rate loan.
Just like with a first reverse mortgage, counseling is required when entering into a refinance for an HECM. However, a borrower refinancing a reverse mortgage can opt out of counseling if all of the following conditions are met:
- The borrower has received and signed an anti-churning disclosure, which is a document stating the borrower is not being pressured to refinance the existing loan without benefit to the borrower.
- The increase in the principal limit exceeds the total cost of the refinancing by five times the cost of the transaction.
- It’s been five years or less since closing on the original reverse mortgage.
YES, you can refinance an HECM reverse mortgage.
The industry refers this to an HECM to HECM transaction.
HECM stands for Home Equity Conversion Mortgage; these are the FHA insured reverse mortgages that make up roughly 95% of the market.
IF you have an FHA HECM Reverse Mortgage, you may be eligible to refinance your loan.
How do I know if I’m eligible for a refinance on my reverse mortgage?
-Has your home increased in value? We need to determine if you have more equity to tap into.
-Is there a clear benefit to you doing an HECM to HECM (this is a requirement to qualify).
-Must meet all previous conditions like age 62+, enough equity, home in good condition, credit/income check.
Equity: If you don’t have more equity in your property you will NOT qualify for a refinance… Equity is the available money in the home if you do the math of subtracting the home’s value minus any outstanding mortgages.
You don’t have to refinance with an existing lender, by comparing multiple banks offers you may find a better lender for your new reverse mortgage loan. Whichever lender you choose, will calculate how much you currently owe on your reverse mortgage plus any other funds you have access to like in a credit line or monthly income draw on. After adding those figures, they will order an appraisal to determine how much your property is now worth and how much you have access to. To qualify the lender has to provide you with an additional $10K in funds.
Benefits of doing an HECM to HECM reverse mortgage refinance in 2016:
-Access to more funds if equity has increased
-To change how you receive your income/funds
-Reduce the interest rate
-Open a credit line
-Receive a monthly income option
-Protect the new equity in your home
Is it a good idea to refinance an existing HECM loan?
Click Quote Save will be your partner in this journey. We can help you analyze the offer the bank makes and explain things in plain terms if any questions come up. In general, YES there is upside in getting a new reverse mortgage loan.
Your property would have gone up in value, so this new found equity is worth protecting and accessing through a new reverse mortgage. If you don’t have a credit line, this is a worthwhile reason to do a refinance alone since this credit line will act as an investment.
Which lenders refinance a reverse mortgage loan?
We have analyzed the entire market and have found the most competitive lender who can refinance your HECM to HECM loan. This specific bank is nationwide, have 100yr of lending experience, and is extremely competitive in doing the HECM to HECM (they charge very little in fees).
What are the current rates for HECM to HECM refinances?
The rates are the same as they are in the normal HECM market. Very competitive but higher than a traditional mortgage rate (there is more risk for the lenders and FHA with the reverse loans). Depending on when you took out your last reverse mortgage loan we are hoping to be able to REDUCE the interest rate so this is another positive to getting a refi done on your HECM.
Additional questions we plan on answering for you in the coming weeks:
What fees can I expect to pay for an HECM refinance loan?
What is the process to refinance an existing reverse mortgage?