How – and When – to Refinance a Reverse Mortgage

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Updated on Friday, January 18, 2019

Many consumers use reverse mortgages to help supplement their income in retirement. Reverse mortgages are a form of home equity loan through which the homeowner exchanges some of the home’s equity for cash, and the lender records a lien against the property. What’s different about reverse mortgages is that you don’t have to make payments to the lender, and the loan doesn’t need to be repaid at all until you no longer occupy the residence.

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Like other mortgages, reverse mortgages can be refinanced. A reverse mortgage refinance only makes sense under certain circumstances, though. Is a reverse mortgage refinance right for you? To make an informed decision, consider the following:

When it makes sense to refinance a reverse mortgage

Of course, everyone’s situation is unique, but there are some situations where it might make sense to refinance a reverse mortgage. These include:

  • Adding a spouse to a loan. “If they’ve remarried, they can add a spouse to the title of the mortgage,” said Kristin Baker, chief of staff for White Oaks Wealth Advisors in Minneapolis. “That way there’s going to be some survivorship benefits if something were to happen.” You may also want to refinance if your spouse was under age 62 at the time you took out your original reverse mortgage. There are some protections in place for spouses who are not on the original reverse mortgage, but those protections depend on when the loan was originated. For peace of mind, you may want to refinance once both spouses are eligible.
  • Borrowing additional funds. Depending on your age and the value of the property, you may be eligible to borrow more than you could when you took out your original reverse mortgage.
  • Getting a lower or fixed interest rate. Over time, reverse mortgage loans accumulate interest. If mortgage interest rates have gone down, or if you have an adjustable-rate reverse mortgage, you may want to refinance to lower your interest rate or to have a fixed interest rate that’s more predictable.
  • Allowing heirs to keep the property. Once the reverse mortgage borrower is deceased, the heirs are required to pay back the reverse mortgage. If they don’t have the cash on hand to repay the mortgage, they can either sell the property and use the proceeds to pay back the loan or refinance from a reverse mortgage to a traditional mortgage so they can keep the property.

If you have a Home Equity Conversion Mortgage (HECM), which is the most common type of reverse mortgage, you were required to meet with an HECM counselor before taking out your mortgage. Although you may not be required to meet with a counselor for refinance, talking to a counselor can help clarify whether a reverse mortgage refinance is the right move for you.

When not to refinance a reverse mortgage

Refinancing a reverse mortgage may not be a good idea if the refinance isn’t going to put you in a better financial situation. For example, if your property value has decreased, or if interest rates have gone up, refinancing may not make sense.

In fact, it may not even be possible. The National Reverse Mortgage Lenders Association has guidelines in place for lenders to prevent refinances that don’t serve the best interests of consumers. These guidelines include:

  • How long you’ve had your reverse mortgage. HECM refinances can only be completed if you’ve had your previous reverse mortgage for at least 18 months.
  • Meeting the closing-cost test. The loan-amount increase of your refinance must be five times more than your closing costs. For example, if your closing costs are $2,000, your new reverse mortgage must be at least $10,000 more than your previous reverse mortgage to pass this test.
  • Meet the loan-proceeds test. Your available benefit must be 5% or more of the amount of your reverse mortgage refinance. In other words, once your closing costs have been paid and your original reverse mortgage has been paid back, what’s left should be 5% or more of the total you refinanced. For example, if your original reverse mortgage was for $100,000, your refinance is for $125,000 and your closing costs are $1,000, you would have $24,000 available. This meets the loan-proceeds test because $24,000 is more than 5% of the $125,000 that you refinanced.

These last two rules are sometimes also referred to as the 5-5 rule for reverse mortgage refinancing.

What you need to qualify for a reverse mortgage refinance

HECM reverse mortgages are insured by the Federal Housing Administration (FHA), so you have to meet qualifications for both the HECM and the FHA.

The qualifications for an HECM reverse mortgage refinance include:

  • Minimum age of 62
  • You must occupy the property as your principal residence
  • You must not be delinquent on any federal debt
  • You must have the financial resources to pay ongoing expenses such as property taxes and homeowners insurance
  • You must have an on-time payment history with regard to your taxes and insurance premiums
  • You must be creditworthy, which is determined by a review of your credit history and verification of your income, assets and employment, if applicable

Your home must meet FHA property standards, which include:

  • Being a single-family home or a two- to four-unit home in which you occupy one unit
  • HUD-approved condominiums
  • Manufactured homes that meet FHA requirements

If you meet the standards and you feel a refinance is in your best interest, then the next step is to start the application process.

The application process

The application process for a reverse mortgage refinance is similar to getting your original reverse mortgage. Although the counseling requirement may be waived, you may still want to take the time to talk to a housing counselor or another adviser before moving forward with your refinance.

“Each situation is so unique; you really want to consult with an adviser on the specific situation,” Baker said.

If you’re going to move forward, reach out to a reverse mortgage lender. They will discuss your reverse mortgage refinance options. If you want to take this option, you will need to complete an application and provide documentation of your income and assets. Your home will also be appraised to assess the current property value.

If everything goes smoothly, you will sign your closing paperwork. You have three days after your loan closes to change your mind, which is referred to as your rescission period.

Hidden costs of a reverse mortgage refinance

As with any mortgage, there are some costs involved in a reverse mortgage refinance that you might not expect. Some of these costs include:

  • Closing costs. These include the cost of the appraisal, any required inspections, credit-check fees and title-search fees.
  • Mortgage insurance premiums. FHA-backed mortgages typically require mortgage insurance. The insurance premiums may be included with your monthly mortgage payments as part of your loan.
  • Origination fees. Lenders typically charge an origination fee. HECM origination fees cannot exceed $6,000.
  • Servicing fees. Your lender may charge a service fee each month. The maximum monthly service fee for a fixed-rate loan or for an adjusted-rate loan that adjusts once per year is $30. The maximum monthly service fee for an adjustable-rate mortgage that adjusts more frequently is $35.

These fees should be clearly spelled out in the disclosure documents you receive at closing.

Is it the right time for a reverse mortgage refinance? It depends on your situation. Take the time to talk with family members or trusted advisers and consider all the factors. If refinancing will put you in a better financial position, it might make sense to move forward. Look at your property value, current interest rates and your plans for the future, and decide accordingly.

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