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A reverse mortgage can be refinanced provided you meet the lender’s eligibility requirements. Refinancing your reverse mortgage will be similar to a conventional mortgage refinance in the sense that you’re replacing your existing loan terms with new terms.
In a reverse mortgage, instead of making mortgage payments to a bank, borrowers receive payments from their lender. As the loan progresses, the equity in the home decreases while fees and interest accrue, increasing the balance. The loan becomes due when the borrower no longer lives in the home as a primary residence, sells the property or dies.
- When can you refinance a reverse mortgage?
- Guidelines for refinancing a HECM
- Ways to refinance your reverse mortgage
When can you refinance a reverse mortgage?
If you’re considering a reverse mortgage refinance, you'll need to familiarize yourself with the many guidelines and restrictions in place.
Regardless of the type of reverse mortgage you’ll need to adhere to your lender’s requirements for refinancing.
The requirements for a reverse mortgage refinance will vary depending on whether your reverse mortgage is a Home Equity Conversion Mortgage (HECM), backed by the Federal Housing Administration (FHA) and issued through an FHA-approved lender, or a proprietary reverse mortgage without federal backing from a private lender.
We’ll focus on the rules that impact HECMs. For information on refinancing a proprietary reverse mortgage or a single-purpose reverse mortgage, contact your lender directly.
Guidelines for refinancing a HECM
Guideline No. 1: In order to refinance a HECM, the borrower must fulfill the following requirements:
- Be 62 or older
- Own the property outright or have a significant amount of equity to pay off the existing loan
- Occupy the home as a principal residence
- Not be delinquent on any federal debt
- Be able to make timely payment of property taxes, homeowners insurance and any other ongoing property charges
- Participate in a consumer counseling session with a U.S. Department of Housing and Urban Development-approved HECM counselor (unless eligible to waive this requirement as noted below)
Guideline No. 2: Additionally, HUD has established other guidelines. For example, the initial mortgage insurance premium (MIP) for a HECM refinance is limited to 3% of the increase in the maximum claim amount minus the initial MIP paid.
To break it down: If the maximum claim amount on the new HECM is $400,000 and the maximum claim amount on the original HECM was $300,000, then 3% of the difference is $3,000.
($400,000 - $300,000) x .03 = $3,000
If the borrower previously paid an initial MIP of $2,000 for the original loan, they would only pay $1,000 in MIP for the refinance.
$3,000 - $2,000 = $1,000
Guideline No. 3: When qualifying a borrower for a refinance, the lender must provide an anti-churning disclosure. Churning refers to a deceptive lending practice of encouraging borrowers to do back-to-back refinances, drumming up profit for the lender in fees and loan charges. This disclosure includes an estimate of:
- The total cost of refinancing (the sum of all fees required to close the loan, including the loan origination fee, initial MIP, etc.)
- The increase in principal limit
Guideline No. 4: Borrowers may also choose to waive the required reverse mortgage counseling if they meet the following criteria:
- The original HECM was initiated on or after Aug. 4, 2014, and the borrower and non-borrowing spouse received counseling (or the loan was initiated before that date and there is no non-borrowing spouse)
- They received the anti-churning disclosure noted above
- The principal limit on the new loan exceeds the total cost of refinancing by a specific amount, as mandated by the FHA (reach out to the FHA to find out the specifics)
- Less than 5 years have passed between closing on the original HECM and applying for the refinance
Ways to refinance your reverse mortgage
If you determine that refinancing your reverse mortgage makes the most sense in your situation, you’ll need to determine the best way to do it. Here are a couple of options.
Refinance a reverse mortgage into a conventional mortgage
You can refinance from a reverse mortgage into a conventional mortgage. This option serves borrowers who no longer need the funds and wish to pay off their reverse mortgage, or those who want to leave their home to their heirs.
When choosing this option, make sure you consider the closing costs associated with the new mortgage, as well as the fact that you’ll now be making mortgage payments again. It's wise to budget for the added monthly payments with the help of a qualified financial advisor, especially if you're retired and don't have new sources of income to rely on.
Refinance your reverse mortgage with another reverse mortgage
If you want to continue tapping into the equity of your home but want to take advantage of lower interest rates, then refinancing into another reverse mortgage may be the best path. Again, consider the closing costs for refinancing and weigh it against the savings gained from the lower interest rates on your reverse mortgage refinance.
You may also wish to refinance into another reverse mortgage if your home has appreciated significantly since you took out the original loan. In this instance, refinancing into another reverse mortgage will also allow you to cash out the new found equity in your property. As stated above, it's important to weigh your need for additional cash against the closing costs that you'll incur through this process.
Regardless of the path you take, make sure that you’ve thought through all aspects of your decision. You’ll want to be confident that your choice lines up with your current financial situation and your future goals. Again, consult with a HUD-approved counselor or a financial advisor to review which path is best for you.