Can You Benefit From Refinancing Your Reverse Mortgage?
Is reverse mortgage refinancing a good idea?
A reverse mortgage is a loan that enables homeowners aged 62 or older to borrow against the equity in their home without having to sell the home, give up title, or take on a monthly mortgage payment. The home equity conversion mortgage (HECM) is the most common type of reverse mortgage, and is administered through a program under the U.S. Department of Housing and Urban Development.
Those who choose to receive their reverse mortgage proceeds as a line of credit option can draw on the loan at the times and amounts of their choosing, subject to a first-year cap enforced by the government and other variables. Other methods of receiving money from a reverse mortgage include term or tenure payments, or a lump sum.
A reverse mortgage refinance consists of refinancing the current reverse mortgage into a new reverse mortgage utilizing the current up-to-date terms and guidelines.
It doesn’t always make sense, but in some cases, it can mean more proceeds for the borrower.
“This basically requires that the terms and calculation of the new reverse mortgage appraisal and value be sufficient enough to pay off the current reverse mortgage loan balance and create a minimum benefit factor (credit line available) of five times the sum of the closing costs charged,” explains Brian Cook, reverse mortgage specialist with Federal Way, Wash.-based Alpine Mortgage Planning.
For example, if the current reverse mortgage loan balance is $150,000 and refinancing the reverse mortgage is only going to provide $130,000 in total, then that’s not going to work because there are not enough funds to pay off the current reverse mortgage, says Certified Reverse Mortgage Professional Beth Paterson, executive vice president of St. Paul, Minn.-based Reverse Mortgages SIDAC.
“If the reverse mortgage loan balance is $150,000 and refinancing the reverse mortgage will get the borrower $155,000 that’s not going to meet HUD’s rule of receiving five times the closing costs,” she says. “However, it still could be done if certain exceptions are met, such as adding a non-borrowing spouse to the title.”
A reverse mortgage can be refinanced for a variety of reasons.
“A reverse mortgage can be refinanced, for example, if the home value has increased and the age of the borrower has increased, to add a spouse to the title and more,” she says.
Continuing a trend seen year after year, HECM to HECM refinance figures are heading up, with 8% of all reverse mortgage loans falling into this category for December 2014, up 39% from Dec 2013 — which was itself more than quadrupled from Dec 2012, Reverse Market Insight data show. But why are people refinancing their reverse mortgage?
Ultimately, people are looking to increase their credit line, Cook says, noting that refinances were an opportunity created by rapidly rising home prices in 2013 and 2014.
Adding a spouse to the title is another popular reason borrowers choose to refinance their reverse mortgages.
“As many senior homeowners age many remarry in their later years,” he says. “If feasible, it is a great opportunity to refinance to a new reverse mortgage with the new spouse on the reverse mortgage to assure that the new spouse can have the same survivorship benefits and continue to live in the property should something occur [to the named borrower].”
The costs to refinance a reverse mortgage are the same as refinancing from a traditional mortgage into a reverse mortgage, although the Federal Housing Administration’s Mortgage Insurance Premium may be less because it is reduced for what was paid with the borrower’s current reverse mortgage, Paterson says.
When considering whether refinancing your reverse mortgage is in your best interest, it’s always best to consult with a financial planner or reverse mortgage expert.
“When you’re refinancing a reverse mortgage you want to make sure it’s in your best interest,” Paterson says.