It may be worth it to refinance your reverse mortgage even though you don’t make a monthly payment — lower rates could help you tap more of your home’s equity. You can also replace your reverse mortgage with a regular mortgage if you can afford the monthly payment and would rather work toward paying your mortgage balance off. Understanding how a reverse mortgage refinance works will help you decide if it’s a good fit for your changing financial needs.
- Can you refinance a reverse mortgage?
- Should I refinance my reverse mortgage?
- How to refinance a reverse mortgage
Can you refinance a reverse mortgage?
You can refinance a reverse mortgage if you qualify and there’s a good financial reason to do so. HECM to HECM refinance guidelines allow you to replace a current reverse mortgage with another reverse mortgage (HECM is short for home equity conversion mortgage, the most common type of reverse mortgage).
You can also refinance a reverse mortgage to a conventional loan if you meet the minimum requirements. Borrowers with bumpy credit histories who want a regular mortgage may qualify for a loan insured by the Federal Housing Administration (FHA). Eligible military borrowers can borrow up to 100% of their home’s value to pay off a reverse mortgage if they’re approved for a mortgage backed by the U.S. Department of Veterans Affairs (VA).
Should I refinance my reverse mortgage?
You should refinance your reverse mortgage to a new reverse mortgage if it helps you with your overall financial situation. Homeowners often choose reverse mortgages because they need to supplement their monthly income or don’t have enough fixed income to qualify for a regular loan.
It may make sense to refinance your current reverse mortgage to another reverse mortgage if:
Your home’s value has increased. A higher home value gives you more potential equity to convert to cash, which could help add to your income or give you a bigger cushion if you choose the line of credit option.
Your local HECM loan limits have increased. HECM loans are tied to FHA loan limits, which change yearly. If it’s been a few years since you took out your current reverse mortgage, you may have more borrowing power with the current HECM loan limit rising to $822,375.
You can get a lower interest rate. A lower interest rate won’t affect your monthly payment, as no monthly payment is required. However, there are two major benefits to refinancing a reverse mortgage to a lower interest rate:
- You may get a bigger initial payout. Reverse mortgage lenders calculate the amount of equity you can tap based on the current interest rate market, and lower rates typically equal a higher “principal limit,” giving you more money you can convert to cash.
- Your equity won’t shrink as fast. One disadvantage of reverse mortgages is that your balance grows over time, and interest is charged on the increasing loan amount. A lower interest rate reduces those charges, leaving more equity in the home to your heirs upon your death.
You want to add your spouse to the loan. If your spouse wasn’t 62 years old when you took out a reverse mortgage, they may encounter some difficulty with the lender after your death. Adding them to the loan gives them protection against a reverse mortgage foreclosure when you die, although the new maximum reverse mortgage will be based on your age.
THINGS TO KNOW
If you took out a HECM, you were required to meet with a counselor certified by the U.S. Department of Housing and Urban Development (HUD). HUD will waive the counseling requirement for you to replace your current reverse mortgage with a new one under the following three conditions:
- You sign the HUD Anti-Churning Disclosure (which we discuss later)
- You’re increasing your principal limit by at least five times the cost of the new loan
- You’re requesting the new HECM within five years of taking out your current reverse mortgage
Refinancing a reverse mortgage loan to a traditional loan
If you took out a reverse mortgage as a temporary solution to bridge a gap in retirement income or pay off some unexpected medical debt, you might want to replace your reverse mortgage with a traditional “forward” mortgage.
This option is worth considering if:
You meet the minimum mortgage requirements. Regular mortgage refinance requirements include vetting your ability to repay the loan based on your credit score, how much debt you carry compared to your income (known as your debt-to-income (DTI) ratio) and your home equity. The table below provides a quick refresher on the common requirements for conventional, FHA and VA loans.
|Loan requirement||Loan type||Minimum requirement|
|FHA||580 with 2.25% equity|
500 with 10% equity
|VA||620 recommended, but VA has no minimum requirement|
|DTI ratio||Conventional||45% to 50%|
|FHA||43% to 50%|
|VA||41%, but exceptions possible|
You need more cash-out than reverse mortgages allow. A cash-out refinance allows you to borrow more than you currently owe and pocket the difference in cash. Most reverse mortgages require you to have at least 50% equity in your home for approval. Traditional mortgage programs permit a higher loan-to-value (LTV) ratio, which measures how much of your home’s value you can borrow.
Below are the maximum LTV ratios for regular cash-out refinance programs.
|Loan program||Maximum cash-out refinance LTV ratio|
How to refinance a reverse mortgage
The process for refinancing a reverse mortgage to another reverse mortgage is different from refinancing to a traditional mortgage. Once you’ve decided on your refinance goal, below is a side-by-side glimpse comparing how to refinance a forward and reverse mortgage:
|Reverse mortgage to reverse mortgage refinance process ||Reverse mortgage to traditional mortgage refinance process |
THINGS TO KNOW
If you’re replacing your current reverse mortgage with a new reverse mortgage, you’ll have to review and sign a HECM Anti-Churning Disclosure to ensure you are getting a proper financial benefit. Churning is an unethical lending practice whereby lenders refinance borrowers multiple times to earn extra profit, with very little, if any, benefit to the homeowner.
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