Many older homeowners have built up significant wealth in their homes from years of steady mortgage payments. But in retirement, living expenses can squeeze a suddenly tight budget. A reverse mortgage can allow these homeowners to access some of that equity in their property as cash.
In some cases, the economy or your financial picture might change after you’ve taken out a reverse mortgage and you might be interested in refinancing. This won’t always be in their best interest, though, and sometimes, it won’t even be an option. We’ll discuss the ins and outs of reverse mortgage refinancing and when it might work for you.
We will cover:
What is a reverse mortgage?
A reverse mortgage is an option for older homeowners to access some of the equity they’ve built up in their home over the years. With this type of loan, instead of making a monthly payment, reverse mortgage borrowers receive money in a lump sum of cash, monthly payments or access to a line of credit.
The loan only comes due when the last borrower on the loan dies or leaves the home. However, the balance at that point will be larger than the amount initially taken out. Interest and fees accrue over time and are added to the total balance owed.
This typically means the borrower’s estate sells the home to pay back the loan. So while reverse mortgages can be a great option to supplement your income in retirement, they’re not so good if you want to pass down the home to your heirs.
The most common type of reverse mortgage is known as a Home Equity Conversion Mortgage or HECM. This program is overseen by the Federal Housing Authority, which insures loans made by private lenders. In order to qualify for an HECM, you must:
- Be at least 62 years old
- Own the property outright or have paid down a considerable amount
- Live in the home as your principal residence
- Not be delinquent on any federal debt
- Have the financial resources to pay property taxes, insurance and homeowner association fees
- Participate in a counseling session by a HUD-approved HECM counselor
The amount you qualify to take out with a reverse mortgage is a percentage of the equity available in your home. This percentage depends on your age and that of your spouse, if applicable. The older you are, the more you’ll generally be able to borrow.
The amount you can take out will also change based on the interest rate available and the value of your home. The higher the interest rate, the less money you will qualify for. The maximum amount borrowers can receive on a HECM is $726,525.
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Why you might want to refinance a reverse mortgage
Interest rates have gone down
Even though you’re not making payments on a reverse mortgage, the interest rate still means a great deal. Your lender continually charges interest on a reverse mortgage, adding those costs to your loan balance and reducing the amount of cash you can access.
So, like a typical mortgage, refinancing can be a good idea if interest rates have dropped significantly from when you took out the reverse mortgage. Lower interest rates mean you’ll accrue less interest that you or your family will need to pay back when the reverse mortgage comes due.
You want to go from an adjustable rate to a fixed rate, or change how you receive your money.
Reverse mortgages are available with either fixed interest rates or variable interest rates. With a fixed rate reverse mortgage, you typically take out the money in a lump sum. With variable rates, you have the option of receiving monthly payments or a line of credit.
If you’ve been getting monthly payments, which typically come with an adjustable interest rate, and you want to receive a lump sum, which often comes with a fixed rate, you might think about refinancing. This can be helpful in certain financial circumstances: Adjustable rates are by definition less stable, and a fixed rate can be beneficial for budgeting.
But a lump sum can be easier to spend through, making a monthly payment option attractive for some people. It’s best to speak with a financial planner that can help talk you through each scenario prior to obtaining your reverse mortgage, but if your circumstances change, a refinance could be a good option.
Your property value has gone up significantly.
If your home is located in a neighborhood where values are rising fast, you might consider refinancing your reverse mortgage in order to have access to more equity. The refinanced loan in this case would be for a larger amount to account for the higher appraised value.
You want to add your spouse onto the loan.
This is a big reason that many choose to refinance reverse mortgages. Because the youngest spouse on the loan needs to be at least 62, some borrowers put just the older spouse or partner on the loan. But since the loan becomes due when the youngest person on the loan dies or leaves the home, it can provide more security for the family to have both partners listed on the loan. A refinance is the only option to add someone to the loan.
Your heirs want to keep the home.
If your family members would like to keep the home once the last living borrower dies or moves out, they will need to pay the loan back. If they do not have the cash on hand, they might be able to refinance the reverse mortgage as a traditional mortgage and pay back the debt in that way.
Guidelines for refinancing reverse mortgages
You’ll only be able to refinance a HECM reverse mortgage under certain conditions. These include:
- The additional cash that a borrower gets from refinancing must equal at least 5% of the new loan’s proposed principal limit — so if the new principal limit is $200,000, the refinance needs to qualify the borrower to receive at least an additional $10,000.
- The money available to the borrower must equal at least five times the refinancing fees, including closing costs — so, if fees are $5,000, the loan refinance must give the buyer access to at least $25,000.
- The borrower can’t refinance their reverse mortgage for at least 18 months, which protects borrowers from loan churning by predatory lenders.
What to consider before refinancing
Before you go ahead with refinancing your reverse mortgage, ask yourself these questions:
- Do I hope to pass on the home to my children? If so, is there a plan for that?
- Have I spoken with them about the loan, and are we all in agreement in making changes?
- Will the refinance affect my ability to pay property taxes and maintenance?
- Have interest rates dropped significantly?
- What will I use the money for?
- Am I working with a trusted lender?
All of these questions can be discussed with a housing counselor.
Risks of refinancing a reverse mortgage
Most reverse mortgage holders are elderly, a population that can be vulnerable to scams. Because of this, it is best to make sure you are working with a trusted lender that is backed by the FHA. Additionally, the federal government has outlined several risks to keep in mind when you go through the process.
HUD has found a pattern of overstated appraisals — inflated by 60% to 100% — being used to increase loan amounts in order to qualify borrowers for a refinance. The loan will be bigger up front in this case, but you’ll quickly owe more than your house is worth. Make sure to do your homework to ensure your appraisal is accurately indicating your home’s worth.
Refinancing a reverse mortgage is not always in the borrower’s best interest. Some predatory lenders will encourage continual refinancing, something called “loan churning,” which allows lenders to collect fees even when there isn’t a benefit to the borrower. Rules like the 18-month delay between taking out a reverse mortgage and refinancing it are meant to protect the borrower from this, but make sure there is a clear need and reason for the refinance before you go down that road.
Fees eating into the benefit
Fees for a reverse mortgage are typically higher than for a traditional mortgage, and in order to refinance, you will need to pay closing costs, a mortgage insurance premium, and usually a loan origination fee. And keep in mind, you’ll still be on the hook for regular homeowner expenses, like property taxes, homeowners association fees and home repairs. Run the numbers to make sure the refinance is well worth the cost of doing so.
The bottom line
Refinancing a reverse mortgage can be the right move for homeowners whose circumstances have changed significantly since taking out the reverse mortgage — if their home is worth considerably more than it was, for instance, or if a spouse must be added to the loan note. But reverse mortgage refis are not without risks, including substantial fees that will eat into the extra money and the potential to run into scams that can do serious financial damage. Make sure you’re working with a trusted lender, and loop in your family to help weigh the benefits and risks with you.
The information in this article is accurate as of the date of publishing.