Refinancing Your Reverse Mortgage
Just as with traditional “forward” mortgages, you might be able to improve on your loan’s rate or terms by refinancing it. People refinance reverse mortgages for the following reasons:
To add a spouse to the loan
To borrow additional funds
To get a lower interest rate
To replace an adjustable rate with a fixed rate
To allow heirs to pay off a reverse mortgage
Recently-enacted changes to HUD’s rules allow seniors to refinance their reverse mortgages for less – getting a credit for previously-paid upfront mortgage insurance. In addition, HUD waives the requirement for reverse mortgage counseling as long as:
It has been less than five years since you took out your original reverse mortgage.
Your principal limit (the amount that you can borrow) increases by at least five times the amount that it will cost to refinance your loan.
You have received a HUD Anti-Churning form.
For HECM refinances, HUD wants to be sure that you, the borrower, are benefitting from the transaction, and that the fees associated with the refinance won’t negate the benefits you receive.
Adding a Spouse to the Loan
Refinancing your HECM to add a spouse involves a few considerations. First, if he or she is younger than you, your maximum loan amount decreases. This may be offset if your home’s value has increased since you took out your original loan. The positive impact of adding a spouse is that he or she is protected from eviction if you die or leave the home – for example, to move into a nursing facility.
Borrowing Additional Funds
You may be able to access more money by refinancing your reverse mortgage. If your home’s value has increased, or interest rates have dropped, it affects the Principal Limit Factor calculation, and you may be able to convert more equity into cash. In addition, you are older than you were when you got your original loan, and that also increases your PLF. A reverse mortgage lender, calculator or counselor can help you determine your maximum loan amount today. Keep in mind that if your current HECM includes a line of credit, you can increase it without refinancing as long as your home’s value has risen.
Lowering Your Interest Rate
Mortgage rates have dropped significantly in recent years, and you might be able to get a better deal by refinancing your reverse mortgage. Get a few quotes from competing reverse mortgage lenders and see. Keep in mind that it’s just as important to shop carefully for a reverse mortgage refinance as it was to shop for your original loan.
Replacing an ARM with a Fixed Rate
Suppose you took out a reverse mortgage with an adjustable rate, and would like to convert it to a low fixed rate. You can do that with a refinance. You can choose to pay off the existing loan with a lump sum at a fixed rate, and even take an additional lump sum (if there is enough equity) at that same fixed rate.
Allowing Heirs to Pay Off Your Reverse Mortgage
If a non-borrowing spouse inherits a home encumbered by your reverse mortgage, he or she will have to repay the loan when you die or allow the property to be sold to repay the loan (any extra proceeds from the sale would revert to your spouse). If your spouse is at least 62 years old, he or she might be able to refinance the reverse mortgage and keep the house. Heirs younger than 62 would need to refinance with a traditional “forward” mortgage instead of a reverse mortgage.
As mortgage rates became more favorable, and home prices began improving, some seniors have found it beneficial to refinance their reverse mortgages. You might want to consider it as well.