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It's a good idea to think about a reverse mortgage refinance if interest rates have fallen, your home value has appreciated or you're worried about what your heirs will inherit.
Before starting the process, make sure you fully understand the terms of your existing reverse mortgage, including how much you currently owe, how much your home's value has changed since you took out the original loan and whether your reverse mortgage is an FHA-backed home equity conversion mortgage (HECM) or proprietary reverse mortgage.
- Does it make sense to refinance your HECM?
- Reasons to refinance a reverse mortgage
- What happens if I don’t pay off my reverse mortgage?
Does it make sense to refinance your HECM?
To determine if you should pursue a reverse mortgage refinance, you’ll need to look at both the benefits and risks of the process. Make sure you fully understand the terms of your existing reverse mortgage before looking into refinancing options.
Consider the following checklist when deciding whether to refinance your reverse mortgage:
- Will the increase in available equity (if applicable) meet your needs?
- Does the interest rate reduction (if applicable) justify the closing costs?
- Have all alternatives been considered, including selling or downsizing your home?
- How will the decision affect both your long- and short-term goals?
- Are you able to maintain the condition of the home, as well as ongoing expenses?
- Will your age and health affect your ability to remain in the home?
Work with your counselor, family members and a financial advisor to help you make your decision. It's a good idea to weigh the costs of the refinance against its potential benefits.
Reasons to refinance a reverse mortgage
Many seniors choose reverse mortgages as a way to provide or supplement income in retirement. However, as with any significant financial decision, borrowers should weigh all options before proceeding. Here are some of the most common reasons to refinance a reverse mortgage or HECM.
Increase the amount of accessible equity
Many borrowers refinance their existing reverse mortgage to take advantage of an increase in their home’s value and to tap into more of the available equity. This is one of the most common reasons for refinancing and is similar to a cash-out refinance.
Take advantage of lower interest rates
Refinancing to a lower rate can increase the longevity of available funds and decrease the pace at which borrowers reduce their equity. Consequently, this will also reduce the rate at which you incur interest if you’re unable to make payments in the interim.
Change from an adjustable rate to a fixed rate — or vice versa
Borrowers may wish to change their type of interest rate, which, in turn, changes the way they receive funds. For example, borrowers refinancing from an adjustable rate to a fixed rate would receive the proceeds of the loan in a lump sum. Those going from a fixed rate to an adjustable rate can choose between a line of credit, monthly payments or a combination of both.
Preserve stake in their home for beneficiaries
Depending on the terms of the new loan (e.g., going from a high interest rate to a lower one), or if a borrower is going from a reverse mortgage to a conventional loan, refinancing could preserve more of the equity in the home to benefit heirs.
By refinancing your reverse mortgage into a conventional home loan, your heirs may be able to assume your mortgage rather than be forced to sell it when you eventually leave the property.
Add a spouse to a reverse mortgage
Borrowers who marry after taking out a reverse mortgage or whose spouse was not originally a co-borrower may wish to add them to the loan. Doing so protects the spouse’s eligibility to remain in the home and to continue receiving proceeds from the loan after the borrower dies or no longer lives at the property.
Keep in mind that, in some cases, some non-borrowing spouses may be able to remain in the home without being on the loan.
Refinance out of a proprietary reverse mortgage into a HECM
Reverse mortgages with private lenders — proprietary reverse mortgages — often come with high fees and unfavorable terms. Refinancing from a private reverse mortgage into a HECM can potentially provide savings and eliminate old terms.
Refinance out of a HECM into a proprietary reverse mortgage
Alternatively, because proprietary reverse mortgages permit higher loan limits, borrowers who want to tap into the home equity in their home values above the HECM limit — $726,525 in 2019 —may choose to refinance into a proprietary reverse mortgage that allows you to exceed those limits.
What happens if I don’t pay off my reverse mortgage?
If you don't make payments to reduce your reverse mortgage balance over time, you will continue to incur interest over time, which will likely add up to a significant balance when the loan eventually becomes due. In some cases, this debt can exceed the value of the underlying real estate.
Your reverse mortgage becomes due once you no longer live in the home. Depending on whether you have a HECM or a proprietary reverse mortgage, your exposure to your lender will depend on your reverse mortgage being a recourse or non-recourse type loan.
Non-recourse reverse mortgage
If you hold a HECM, your reverse mortgage will likely be a non-recourse loan. This means that lenders can only lay claim to the underlying property for repayment. If the debt exceeds the value of the property, the Federal Housing Administration (FHA) will absorb any balance that isn’t covered by the home sale.
Recourse reverse mortgage
If your reverse mortgage is a recourse loan, which can be the case for some proprietary reverse mortgages, the lender can go after the borrower (or their estate) for any balance that remains even after foreclosing on the property. That means that your debt is not limited to the value of your home.
If you leave your property while a recourse-type reverse mortgage is outstanding, you will remain liable for the remaining debt if your home sale doesn't generate enough money to cover your balance. This means that the lender can sue you in court to collect what they’re owed in the event of a short sale.
Homeowners who die with outstanding recourse reverse mortgages may have their property foreclosed on by the lender. If the subsequent home sale is not enough to cover the balance, the lender may continue to pursue the remaining debt against the deceased’s estate.