As they reduce their house debts, many homeowners refinance their conventional mortgages in order to get better terms. Refinancing a reverse mortgage, a loan that enables senior citizens to access their home equity without selling or making regular payments, is another option.
Here’s how a reverse mortgage refinancing works and when it can be advantageous financially to do so.
- With a reverse mortgage, homeowners who are 62 years or older may access their equity without having to sell their property or make regular payments.
- The financing is postponed until you sell the house, vacate the property, or pass away.
- An old mortgage is replaced with a new loan with improved conditions via refinancing.
- Refinancing a reverse mortgage may help borrowers acquire additional money, a better rate, or the ability to include a spouse in the loan.
What Is a Reverse Mortgage?
Homeowners who are 62 years or older may access their equity via a reverse mortgage. With a reverse mortgage, the lender pays you instead of the other way around as with a typical mortgage (also known as a forward mortgage), where you make monthly payments to the lender. When you sell the home, vacate the property, or pass away, the loan and interest become due.
Although you don’t have to make monthly payments if you have a reverse mortgage, you must pay all property costs on time, including taxes, insurance, homeowners association dues, and upkeep, in order to prevent default or foreclosure.
What Is Refinancing?
When you use funds from a new loan to pay down an existing mortgage, this is known as a refinancing. Refinancing is often done by homeowners to get better loan conditions, including a reduced interest rate or a shorter loan term. You are left with a single loan and a single monthly payment when your lender utilizes the new loan to pay off the old one.
Refinancing a Reverse Mortgage
While refinancing is a popular tool for improving the terms of traditional (or forward) mortgages, it’s also an option if you have a reverse mortgage. When you refinance a reverse mortgage, you essentially trade in your existing loan for a new—and, ideally, better—one. The new mortgage could be either another reverse mortgage or a traditional (or forward) mortgage.
If you opt for a new reverse mortgage, the new loan amount will be based on your age, the home’s value, and the interest rate, just as it would with getting a loan for the first time. You can receive the loan proceeds as a lump sum, a line of credit, regular monthly payments, or a combination of the latter two.
Conversely, if you refinance into a traditional mortgage, the new loan will be contingent on your income, credit score, and interest rate, just as it would with getting a mortgage for the first time. If you need retirement funds, you can choose a cash-out refinance. This type of loan replaces your current mortgage with a larger loan, and you receive the difference in cash.
Reverse Mortgage Refinance Eligibility
The requirements for a reverse mortgage refinance are nearly identical to those for getting a reverse mortgage the first time around. If you want to refinance into a new HECM reverse mortgage, you must:
Additionally, the property must meet FHA requirements, such as being adequately insured and free of health or safety hazards.
A cash-out refinancing allows you to access up to 80% of your home equity as opposed to the 50% to 60% you might with a reverse mortgage.
Reasons to Refinance a Reverse Mortgage
The following circumstances may warrant refinancing your reverse mortgage.
- Your house is now worth more money. Your home equity may have grown if the value of your house has gone up. If so, a new reverse mortgage could allow you to receive additional money.
- Rates of interest have decreased. If rates have dropped after you obtained your first reverse mortgage, the payoff and total interest you pay when the loan matures may be higher.
- You want to include a spouse or companion. In order to safeguard them if you pass away first, you must restructure the loan and add a co-borrower. A reverse mortgage cannot simply be expanded to include a new borrower.
- The HECM cap has been raised. The $970,800 cap on HECM reverse mortgages is an increase over the $625,500 cap that was in place ten years ago. If the limitations have increased, a new reverse mortgage can allow you to access additional equity.
- You need more money than what your reverse mortgage can provide you. You may borrow more money than you owe with a cash-out refinancing into a conventional mortgage and keep the difference in cash.
The financial gain of refinancing typically has to be at least five times the costs in order to be profitable. For instance, if refinancing costs $5,000, it should increase your ability to borrow at least $25,000 as a result.
You may choose a proprietary reverse mortgage, also known as a jumbo reverse mortgage, to enhance your borrowing capacity when you refinance if the value of your house exceeds the $970,800 HECM limit.
Reasons to Skip Refinancing a Reverse Mortgage
Of course, it’s not always a good idea to refinance a reverse mortgage. Here are some strong arguments in favor of keeping your current reverse mortgage.
- The financial advantages of refinancing are outweighed by the closing charges.
- Since you obtained your reverse mortgage, the value of your house has fallen.
- If your heirs wish to retain the house after you move out or pass away, you don’t want to raise your debt and make it more difficult for them to repay the loan.
- Your loan revenues would decrease if you added a younger co-borrower (the amount that you can borrow depends on the age of the youngest borrower).
- You suspect the refinancing may be a fraud.
What are the pros and cons of a reverse mortgage refinance?
Refinancing your reverse mortgage might provide you access to additional home equity, better interest rates, and new payment alternatives. Adding a new co-borrower to the loan, such as a spouse or partner, is another option. However, refinancing comes with costs that may quickly deplete home equity and make it difficult to repay the loan.
Can you transfer a reverse mortgage?
No. While certain mortgages may be transferred from one borrower to another via assumability, reverse mortgages cannot be transferred. To add a co-borrower, such as a spouse, partner, or kid, you may refinance one loan.
How do you pay off a reverse mortgage?
When the final borrower named on the loan sells the home, vacates the property, or passes away, the reverse mortgage becomes payable. The money from the sale of the house is often used to pay down reverse mortgage debts.
The Bottom Line
If your home’s value has improved or your financial condition has changed after you took out the first loan, refinancing a reverse mortgage can make sense. If the HECM loan limitations or interest rates have changed, you could also be able to negotiate a better deal on a new loan. Whatever your motivation for refinancing, do the math to make sure it makes sense financially and shop around to get the best rate.
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