A reverse mortgage is a type of mortgage that allows qualifying homeowners to access their home equity as a source of income. It’s called a reverse mortgage because it involves the lender making regular payments to the borrower, unlike a standard mortgage in which the borrower makes payments to the lender. Like standard mortgages, reverse mortgages can be refinanced, which can make sense under certain circumstances.
What are the types of reverse mortgages?
Several types of reverse mortgages are commonly available. A Home Equity Conversion Mortgage (HECM) is a reverse mortgage that's insured by the Federal Housing Administration (FHA). A HECM for Purchase is a variation that borrowers can use to buy a new home. A proprietary reverse mortgage is similar to a HECM except it isn't insured by the government. A single-purpose reverse mortgage may be used only for a specific purpose.
How do you qualify to refinance a reverse mortgage?
Refinancing a reverse mortgage essentially means that you're replacing your existing reverse mortgage with a new one. The new reverse mortgage may have completely different terms from the original reverse mortgage, so it's quite similar to a conventional mortgage in that respect.
Qualifying for a reverse mortgage refinance is generally more difficult than qualifying for a conventional mortgage refinance because it requires additional criteria. That’s because a reverse mortgage refinance represents greater risk for the lender than a conventional mortgage refinance. Lenders will therefore require borrowers to have a more favorable profile, including credit score, earnings and living expenses. Borrowers must also meet with a loan counselor who specializes in reverse mortgages before they can be approved.
Homeowners can use the 5-5 rule to determine whether refinancing their reverse mortgage would benefit them. The National Reverse Mortgage Lenders Association (NRMLA) developed this rule, which says the principal amount of the new reverse mortgage should be at least five times its closing costs. Furthermore, the proceeds from the loan should be at least 5% of the amount being refinanced. The 5-5 rule also requires homeowners to wait at least 18 months after closing on their original reverse mortgage before refinancing.
The FHA has additional requirements for its reverse mortgages that involve the property itself. It must be a one-unit dwelling occupied by the owner, with no safety or health hazards. The property must also be insured for floods if it's in an area at risk for flooding.
Refinancing a reverse mortgage has other requirements, depending on whether it's a HECM or non-HECM.
The specific requirements for refinancing a HECM are generally the same as they were for obtaining the original HECM. The borrower must be able to meet the financial obligations of owning a home, including property taxes, homeowner’s insurance and homeowner’s association fees. The borrower also must have considerable equity in the house and reside there as a permanent resident. The borrower must be at least 62 years of age and have no delinquencies on federal debts.
The requirements for refinancing a non-HECM depend on the lender. In general, the lender will require borrowers to be financially stable, having enough equity in the property to support a reverse mortgage. Non-HECM refinancing are rare, as few private lenders find them to be profitable.
What else do I need to know about refinancing a reverse mortgage?
The most significant considerations in the refinancing mortgage are the interest rate and spousal protection.
The most common reason for refinancing a reverse mortgage is that interest rates have dropped significantly since you closed on your original reverse mortgage. If rates are now particularly low and you have a variable-rate mortgage, it may make sense not only to refinance but also to get a fixed-rate reverse mortgage. That way, if rates spike later, you will be insulated from the impact. If your home has appreciated since you closed on your first reverse mortgage, you might consider refinancing to increase the payout you receive.
The biggest disadvantage of refinancing a reverse mortgage is that it accrues interest, which must eventually be paid to the lender. A refinance may result in a larger repayment to the lender due to closing costs, even if the interest rate is lower. To prevent this outcome, you should refinance only if the interest rate on the new reverse mortgage is at least 2 percentage points lower than the rate on your current reverse mortgage. This rule for balancing the cost of a refinance against the savings in interest generally applies to conventional mortgages as well.
Protecting a spouse is a common reason for refinancing a reverse mortgage, since this act can provide the spouse with continued income. A borrower who gets married after getting a reverse mortgage may want to refinance to add the spouse to the loan, even if the terms of the refinance are less favorable. This strategy will allow one spouse to continue living in the home and to receive income from the reverse mortgage even if the borrower dies first or has to move into a nursing home before the spouse. Ordinarily, payments from a reverse mortgage would stop when the borrower dies or moves out of the house. In the event of the borrower’s death, the surviving spouse could be required to repay the loan in full immediately if that person isn’t a beneficiary on the original reverse mortgage, which often means selling the house.
The terms for a HECM may allow a spouse to remain in the home after the borrower dies or moves out, even if the spouse isn’t listed as a co-borrower on the original mortgage. It’s therefore important to understand this issue, especially if the terms of a refinance would be less favorable.
What are the alternatives to refinancing a reverse mortgage?
Consider Figure’s mortgage refinance if you’re looking for an alternative to a reverse mortgage. This financial product is a refinance with a cash-out option, meaning that you can take out a new loan to pay off your old loan and have cash left over to devote to another use. This option is most useful if you need to pay for major home repairs or a large home improvement project that will increase the value of your home. A cash-out refinance is also a good strategy for consolidating high-interest debt.