May 5, 2017 in Mortgages

5 facts about refinancing a reverse mortgage loan

Life changes. And if the reverse mortgage loan you took out years ago no longer fits, you might be able to refinance it.

Here are some typical reasons why borrowers seek a reverse mortgage refi:

Today’s landscape of low interest rates and recovered home values can make refinancing attractive for a number of reverse mortgage borrowers.

Interested? Take a look at five things you need to know about a reverse mortgage loan refi.

If you’ve ever refinanced a traditional mortgage, some of the steps involved in refinancing a reverse mortgage loan will already be familiar.

You’ll want to get quotes from your current lender and at least a handful of others, so you can compare rates, fees and terms.

Note that in the last few years, big banks like Wells Fargo and Bank of America have exited the reverse mortgage market. So if that’s where your original reverse mortgage loan came from, you’ll automatically be looking for a new lender.

You’ll need a new reverse mortgage home appraisal. That cost depends on where you live and the size of your home, but the average is $450, according to the National Reverse Mortgage Lenders Association.

As you shop around for a reverse mortgage loan refinance, you’ll notice that terms and fees can vary widely.

It’s important to understand exactly why you’re seeing those differences. Does one lender really have lower fees, or is the company rolling some of the costs into your loan balance?

“Some lenders will cut the upfront costs in return for a higher interest rate,” says Steven Sass, an economist with the Center for Retirement Research at Boston College.

An example: If you’ll take a higher rate, your lender might be willing to waive its origination (processing) fee, says Mary Jo Lafaye, a reverse mortgage loans specialist with Retirement Funding Solutions in San Diego.

If your refi involves switching to a reverse mortgage line of credit, note that the credit line will grow if interest rates rise, and those adjustments can come annually or even monthly.

Most reverse mortgage loans are insured by the Federal Housing Administration under its home equity conversion mortgage (HECM) program. The FHA offers consumer protections, including the promise that you’ll never owe more than your home is worth at the time the loan comes due.

In exchange for those safeguards, the FHA requires the borrower to pay mortgage insurance, including an initial premium due at closing of at least 0.5 percent of the appraised value of the home.

The good news with a refi is that you get a credit for the upfront mortgage insurance premium you paid on your original reverse mortgage loan.

If the new initial premium is higher, some lenders will pay the difference, says Lafaye. Others will simply roll that into the new loan balance.

Remember that your refi — like any reverse mortgage loan — also will require you to pay ongoing mortgage insurance premiums equal to 1.25 percent of your outstanding loan balance each year.

As was the case the first time you took out a reverse mortgage loan, you may be required to go through loan counseling with a housing counselor trained by the Department of Housing and Urban Development.

The counseling is available face-to-face or by phone and typically costs about $125, though it may be offered free of charge to lower-income borrowers.

In some instances, refinancers are allowed to skip this step. But that can be a bad idea. The rules governing reverse mortgage loans are intricate, exacting and constantly changing. Even lenders and industry experts find it challenging to stay current.

The counseling session is a good opportunity to get briefed on what’s new since you got your first loan, says Brian Sullivan, a HUD spokesman. It’s also a chance to ask lots of questions and run the details of your new deal past a neutral third party.

If your home has increased a great deal in value, you might think that refinancing your reverse mortgage loan is to your advantage.

However, a refi may not be the way to go if you might ever want to sell the home and downsize to something smaller. The loan would need to be paid off.

Instead of refinancing, here’s an option you’d want to keep in your back pocket: You could eventually sell, pay off the reverse mortgage loan and use any remaining profits plus another reverse mortgage to purchase your next home.

Under the government’s HECM for Purchase program, a borrower 62 or older can use a reverse mortgage loan to cover up to 52 percent of a home’s purchase price and use cash on hand to fund the rest.

As with any other HECM loan, you still cover the property taxes, homeowner’s insurance and maintenance costs. But you live free of mortgage payments and pay off the loan when you sell, no longer occupy the home as your primary residence or can no longer meet the loan terms.

Think a reverse mortgage loan might be for you? Here are six questions you should ask.