Reverse mortgages can offer homeowners ages 62 and older access to home equity. As with a regular mortgage, a reverse mortgage can be refinanced, and doing so sometimes makes sense.
What Is a Reverse Mortgage?
A reverse mortgage is a loan that allows older borrowers to tap into their home equity. Unlike a standard mortgage, which requires the borrower to make payments to a lender, a reverse mortgage calls for a lender to make regular payments to the borrower.
Interest accrues on the loan, with repayment on the principal and interest deferred until you sell the home, move out or pass away. This can be a helpful way to supplement your retirement income, but it subtracts equity from your home.
Types of Reverse Mortgages
A few kinds of reverse mortgages are available:
Home Equity Conversion Mortgages, also known as HECMs, are insured by the Federal Housing Administration. HECM for Purchase mortgages are also available and can help you buy a new home.
Proprietary reverse mortgages are similar to HECMs, but they do not have government backing.
Single-purpose reverse mortgages are used for one specific purchase.
How a Reverse Mortgage Refinance Works
Regardless of your reason for wanting a reverse mortgage refinance, knowing what the process involves is helpful.
Refinancing a reverse mortgage is similar to refinancing a conventional mortgage, says Chris Downey, president of Harbor Mortgage Solutions, a Boston-area residential mortgage company.
Essentially, you're replacing your reverse mortgage with a new and ideally better one. The new loan may carry a different interest rate or offer a different monthly payout, depending on the terms of refinancing.
Qualifying for a reverse mortgage refinance requires meeting some specific criteria.
"There would need to be a very clear, defined benefit for a lender to justify refinancing a customer's reverse mortgage," Downey says.
For homeowners, the 5-5 rule can help determine whether refinancing will be beneficial. This rule, established by the National Reverse Mortgage Lenders Association, says that when refinancing a reverse mortgage:
-- The increase in the principal amount must be equal to or more than five times the loan closing costs.
-- Loan proceeds must be equal to or more than 5% of the amount being refinanced.
Additionally, homeowners must meet a seasoning requirement, which pertains to how long you have held your mortgage. You can refinance no earlier than 18 months from when you closed on your original reverse mortgage.
The borrower also has to be qualified for a new reverse mortgage loan. The good news is that the criteria used to qualify borrowers for a reverse mortgage may be the same when refinancing.
For HECMs, borrower requirements include:
-- Being age 62 or older
-- Using the home as your primary residence
-- Owning the home outright or having paid down a considerable amount of the original mortgage
-- Not being delinquent on a federal debt
-- Having the ability to meet financial obligations related to the home, such as property taxes, homeowners insurance and homeowners association fees
The property itself also has to meet FHA requirements. Generally, that means the home must be one unit occupied by the owner, it must have no health or safety hazards, and the owner must carry flood insurance in a high-risk area.
[Read: Best Home Equity Loans.]
Borrower earnings, assets, living expenses and credit scores are also used to paint a full financial picture for reverse mortgage lenders. And borrowers are also required to meet with a reverse mortgage loan counselor as part of the process.
Requirements may vary if you're refinancing a proprietary reverse mortgage, or a non-HECM, through a private company. Still, lenders will need you to demonstrate financial stability and have enough equity to support the new reverse mortgage. Generally, most reverse mortgages are HECMs because proprietary reverse mortgages aren't widely available.
Should You Refinance a Reverse Mortgage?
Reverse mortgage refinancing is an option that makes sense in certain situations.
"There are many reasons it may be beneficial to refinance your existing reverse mortgage," says Vivian Dye, reverse mortgage consultant at New York-based GuardHill Financial Corp. "It may have been several years since you closed, and rates may have lowered, or it makes more sense to switch from an adjustable rate to a fixed rate. Perhaps your home has appreciated in value, and you have additional equity you'd like to tap into; refinancing can increase the amount of money you're eligible to receive from the loan."
Additionally, refinancing a reverse mortgage may be a good choice if you want to add your spouse to the loan because he or she wasn't on the original loan. Doing so would allow your spouse to stay in the home and extend income benefits from the reverse mortgage to your spouse if you die first, or if you move out of the home to a nursing home, but your spouse doesn't.
Of course, reverse mortgage refinancing has some drawbacks. Remember, the mortgage has to be paid back to the lender eventually, and interest accrues on the loan. And if you end up with a higher interest rate than your original loan, this would mean a higher loan balance to repay.
Interest. When deciding on a reverse mortgage refinance, consider the interest rate environment. Dye says that among homeowners with a conventional mortgage, refinancing typically only makes sense if rates have fallen by at least 2%.
"Most conventional refinances are done to save money on interest payments, and this rule of thumb captures the trade-off between saving on interest and paying for the new loan," she says.
You could apply that same rule of thumb to refinancing a reverse mortgage. When interest rates rise, as they did throughout 2018, refinancing reverse mortgages or other home loans could wipe out gains in interest savings.
Spouse protection. Refinancing to add a spouse to the loan can provide a couple a measure of financial protection and comfort. If the spouse who took out the loan dies or moves out of the home, loan distributions stop. Additionally, widows or widowers might be required to pay loans in full immediately if they aren't on the loan documents, which could require selling the home. Both spouses should be listed as borrowers on the reverse mortgage to ensure that a surviving spouse can continue to live in the home.
However, precise rules for HECM loans may allow a surviving spouse to stay in the home even after the borrowing spouse dies or moves out. Consider whether a surviving spouse would be covered under these rules before refinancing just to add him or her to the loan.
Equity access. Refinancing to draw out more of your home's equity has benefits and drawbacks. The obvious benefit is having more cash coming into the household to cover retirement expenses. The drawback, however, is a larger balance to repay later. Reverse mortgages typically must be paid off when the last surviving borrower dies, or possibly sooner if the home is no longer the primary residence, if taxes or insurance are unpaid, or if repairs are needed.
If the reverse mortgage loan balance grows larger than the value of the home, and the home is sold to repay the loan, neither the borrower nor the borrower's heirs will have to pay more than the home is worth. The insurance will pay for any shortfall, as long as the home sells for at least 95 percent of the appraised value.
Loan fees. Refinancing a reverse mortgage usually means paying closing costs and other fees.
Depending on the lender, refinancing might mean paying:
-- Loan origination fees
-- Mortgage insurance premiums
-- Appraisal fees
-- Credit report fees
-- Pest inspection fees
-- Loan administration fees
-- Recording fees
-- Document preparation fees
-- Survey fees
-- Title insurance fees
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These fees can easily add several thousand dollars to the cost of a refinance, so plan for them well ahead of time.
"As with most refinances, the benefits must clearly outweigh these costs," Downey says.
Reverse Mortgage Refinance Alternatives
Rather than refinancing into a new reverse mortgage, borrowers could refinance into a conventional mortgage.
This could make sense for borrowers who can no longer live in the home but don't want to sell it or if heirs are concerned about being able to repay the reverse mortgage. Or borrowers could decide they no longer need the income the reverse mortgage provides.
Of course, refinancing into a conventional loan means having to make regular payments toward the mortgage rather than receiving payouts, as you would with a reverse mortgage. And borrowers would still have the same interest rate and closing cost considerations to contend with. Considering the out-of-pocket expenses of switching to a conventional loan that arise before and after refinancing is essential.
One alternative to refinancing is modifying the payment terms of your reverse mortgage. With HECM loans, for instance, borrowers can choose to receive monthly payments for the rest of their lives; monthly payments for a fixed period of time; a line of credit; or a combination of monthly payments and a line of credit.
A modification could increase the payout for a borrower switching from a line of credit to a monthly payment for a life term. This would not, however, affect the interest rate of the loan or the total amount of equity the borrower can access. For either of those factors to change, you would need to refinance.
Perhaps you have considered the alternatives and determined that a reverse mortgage refinance is your best option. Ultimately, a reverse mortgage refinancing decision is a numbers game. But the decision also depends on what you hope to get out of refinancing, whether it's interest savings, more retirement income or something else.
"The only way a homeowner can accurately assess if refinancing a reverse mortgage makes sense is to first identify what their goals and objectives are," Downey says. "Each individual's needs and financial and/or health issues will ultimately dictate what course of action they should take."
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