Many homeowners who have a reverse mortgage loan receive aggressive marketing solicitations to refinance it. The phone rings, the mail arrives and the offers pour in, promising more money, a higher credit limit, lower interest rate, easier rules and more.
But is refinancing a good idea?
Almost all reverse mortgage loans today are home equity conversion mortgages, or HECMs, insured by the Federal Housing Administration, a division of the U.S. Department of Urban Development.
These home loans enable senior homeowners to borrow against their equity and continue to live in their home without making mortgage payments. The principal, fees, interest and mortgage insurance become due and payable only when the homeowner moves out for at least 12 months, sells the home or dies.
The borrower is still responsible to annually pay for property tax, insurance and maintenance, however.
Lenders typically won’t originate a second mortgage or home equity line of credit (HELOC) when a HECM already exists. That can make refinancing the HECM seem attractive.
“It’s a big market,” says Maggie O’Connell, reverse mortgage loan specialist at The Federal Savings Bank in Reno, Nevada.
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A way to pocket cash
Refinancing can involve high fees and a higher interest, so it makes sense only if there’s a bona fide benefit for the homeowner.
The most desired benefit is money, says Eric Meehan, owner/broker of Golden Opportunity Mortgage, a reverse mortgage loan company in Solana Beach, California.
“The only benefit is cash. Honestly, to be really blatant, it’s just cash,” Meehan says.
Some borrowers need money for daily living expenses. Others want to pay for specific needs, such as medical services, in-home care or aging-in-place remodeling. Still others want to be prepared for future needs.
Rising home values can make the numbers work. In fact, some homeowners refinance repeatedly to extract cash as they get older and their home becomes more valuable.
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To illustrate the decision points, Beth Paterson, certified reverse mortgage loan professional at Reverse Mortgage SIDAC in St. Paul, Minnesota, describes two borrowers who contacted her to ask whether they should refinance.
The first borrower was receiving 10-year monthly payments and had unused funds available on his HECM line of credit.
“Why would he need to refinance?” Paterson says. “His home had not appreciated enough in value to give him access to more funds and he’s not going to benefit from any more money.”
The second borrower obtained her loan many years ago, when the loan limit was lower than it is today. Her house was worth more than that limit and she’d nearly run out of money from her credit line.
“In her case, it would make sense to refinance if she is planning on staying there,” Paterson says.
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Read the required disclosures
The federal government imposes additional requirements for what it refers to as HECM-to-HECM refinances.
HUD’s regulations, outlined in a June 30, 2009, Mortgagee Letter, include an Anti-Churning Disclosure form, which aims to notify borrowers that they’re supposed to receive a benefit if they refinance a HECM.
Lenders also are required to disclose their “best estimate” of the borrower’s total cost to refinance and the increase in the amount of money the borrower will be able to withdraw.
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Tests for HECM-to-HECM refinancing
The National Reverse Mortgage Lenders Association, or NRMLA, a Washington-based trade group of reverse mortgage lenders, has promulgated rules for HECM-to-HECM refinances as well.
These rules say:
Borrowers must wait at least 18 months to refinance.
The refinance must pass a closing cost test and loan proceeds test.
The closing cost test requires that the increase in the borrower’s loan amount be at least five times the closing costs.
The loan proceeds test requires that the additional principal available to the borrower must be at least 5 percent of the amount being refinanced.
A refinance that simply restructures a HECM “does not itself provide a bona fide advantage,” NRMLA states. An example of restructuring would be to switch from a credit line to a lump sum.
Meehan says most major HECM lenders follow NRMLA’s rules.
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When you add or remove a spouse
Refinancing a HECM can offer benefits other than cash.
HUD’s rules specifically allow refinancing to add a borrower. That’s important because borrowers must be 62 years old and some seniors obtain a loan while they’re married to or before they marry someone who’s not old enough to qualify as a borrower.
Some non-borrowing spouses have certain protections against eviction when the borrower dies, but there are important exceptions. For example, a spouse who marries a borrower after a HECM is originated might not be protected.
It’s not clear whether removing a borrower (for example, due to divorce) or removing a life expectancy set-aside, or LESA, would be construed as a benefit.
A LESA is a sum taken off the top of a HECM to pay the borrower’s property tax and homeowner insurance. This set-aside may be required if a financial assessment shows the borrower has had or might have difficulty paying those bills.