Is it possible to refinance a reverse mortgage?
The short answer is yes. And there are several reasons why you might want to consider doing so, but also reasons to avoid it and look for other solutions.
7 reasons to refinance a reverse mortgage
If you have an older Home Equity Conversion Mortgage (HECM), you may want to consider refinancing.
The HECM program has undergone several changes in recent years, and refinancing your reverse mortgage could potentially provide you with a better interest rate or lower fees than your original loan.
Refinancing your HECM can also help you access more of your home equity if the value of your home has increased since you first took out your reverse mortgage. This can provide you with additional funds to help cover expenses, make improvements to your home, or have a more worry-free retirement.
Interest rates can significantly impact the amount of money you can access through a reverse mortgage.
Mortgage rates of all kinds have increased lately. However, if you received your reverse mortgage in 2022 or later, watch for interest rates to drop. If that happens, refinancing could allow you to tap into more of your home equity and potentially lower your monthly mortgage insurance premium (MIP).
Additionally, refinancing to a lower interest rate can help reduce the overall cost of your reverse mortgage, which can be especially beneficial if you plan to remain in your home for many years.
If your spouse was not included as a borrower on your original reverse mortgage, refinancing provides an opportunity to add them to the loan.
This factor is important if the non-borrowing spouse is younger than the borrower, as it can help ensure that they can continue to live in the home after the borrower’s death.
By adding a non-borrowing spouse to your reverse mortgage, you can potentially extend the life of the loan and provide additional peace of mind for both you and your spouse.Protect your spouse. Start here.
If you currently have an adjustable-rate reverse mortgage, you may want to consider refinancing to a fixed-rate loan.
Fixed-rate loans can provide you with more predictable payments and protect you from potential interest rate increases in the future.
Fixed-rate reverse mortgages can be especially beneficial for homeowners who plan to remain in their homes for an extended period, as they can help provide long-term financial stability and peace of mind.
5. Your home value went up (or you got older)
If the value of your home has increased since you first took out your reverse mortgage, refinancing may allow you to access more of your home equity. The additional funds may help cover expenses or make improvements to your home.
Furthermore, refinancing can potentially help you qualify for a higher loan amount if your home’s value has increased significantly since your original loan was issued.
Another factor that helps you access more of your home’s equity: being older. Because reverse mortgage funds are dependent on life expectancy, the program lets you take a bigger loan amount at an advanced age.See if you’re eligible to tap into more of your home’s equity.
If your current reverse mortgage is an FHA-insured HECM, consider refinancing to a non-government proprietary reverse mortgage program. These programs typically offer higher loan limits, which can be especially beneficial for homeowners with high-value homes.
By refinancing to a proprietary reverse mortgage, you may be able to access more of your home equity and potentially obtain better loan terms than those available through the HECM program.
However, keep in mind that non-government reverse mortgages don’t come with the same protections.
You can refinance out of a reverse mortgage into a “forward” mortgage. Keep in mind that you won’t have access to additional funds, and you’ll owe a monthly payment. If you don’t make your payment, your home could be foreclosed.Refinance into a traditional “forward” mortgage.
4 reasons NOT to refinance your reverse mortgage
Like with any financial product, there will be negative consequences that could arise from a reverse mortgage refi depending on your financial situation.
1. You don’t meet the 10% equity rule
One reason you might want to avoid refinancing your reverse mortgage is if you don’t meet the 10% equity rule.
You must be able to increase your reverse mortgage by at least 10% of your home’s value. For instance, if your home is worth $500,000, you must be able to increase your reverse mortgage by $50,000 if refinancing to another reverse mortgage.
Another reason to avoid refinancing your reverse mortgage limit is if your reverse mortgage amount doesn’t increase by five times the cost of the transaction.
For instance, if you have $20,000 in closing costs, you must get $100,000 in additional available funds from the refinance.
You must meet both the 10% rule and the 5x rule to be eligible for a refinance.See if you meet the 5x rule.
You can only refinance a reverse mortgage with another reverse when you’ve had the existing loan for 18 months or longer
If you spend $10,000 in closing costs only to get $50,000 in extra cash, that’s the equivalent of a 20% interest rate your first year! That’s a bad deal. Try to find other ways to access cash.
Reverse mortgage closing cost aren’t cheap. These financial transactions often involve steps such as appraisals, title searches, and document preparation, which necessitate the involvement of multiple professionals.
Consequently, each of these professionals may charge their fees, contributing to the overall closing costs. Additionally, lenders may impose origination fees, which can be a percentage of the loan amount, further adding to the total cost.
Various federal, state, and local regulations often necessitate additional services such as inspections, surveys, and insurance policies. These additional requirements can drive up the closing costs.
- Evaluate your current reverse mortgage and determine if refinancing makes sense based on your specific situation and financial goals.
- Shop around and compare loan offers from multiple reverse mortgage lenders to find the best terms and rates.
- Gather all necessary documentation, including your current loan statements, proof of income, and other financial documents.
- Complete the loan application process and pay any required fees.
- Attend a mandatory reverse mortgage counseling session to ensure you fully understand the terms of your new loan.
- Close on your new reverse mortgage and use the funds as needed.
Refinancing a reverse mortgage can be a smart financial move for many homeowners, but it’s essential to carefully consider the potential benefits and drawbacks before making a decision.See if a reverse mortgage refinance is right for you. Start here.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.