Living on a fixed income can leave retirees with few financial options to pay for things like unexpected emergencies or bucket-list vacations. If you’re a retiree and own a home, however, getting a reverse mortgage is one way to access cash, either in a lump sum, through monthly payments or a line of credit.
Reverse mortgages allow homeowners age 62 and older to take advantage of the equity they’ve built in their homes and borrow against it. Borrowers are not obligated to repay the loan as long as they live in the house, making it an attractive solution for many seniors. The downside of these types of loans is that once you deplete the equity, you can’t get another loan using your house as collateral. If you want to sell your house, you’ll have to repay the loan first.
The Home Equity Conversion Mortgage, or HECM (pronounced HECK’m), administered by the Federal Housing Administration, makes up the bulk of reverse mortgages in the country.
Can you refinance a reverse mortgage?
The short answer is yes. Refinancing a reverse mortgage is possible, but the real question is: Should you? There are good reasons to refinance a HECM or other type of reverse mortgage, such as when you need to add a spouse to the agreement or if you accrue more equity and can claim bigger payments.
If you do choose to refinance, you would basically get a new reverse mortgage with updated terms and guidelines. Here are five steps to deciding whether to refinance.
1. Calculate how much financial sense it makes
Refinancing a reverse mortgage to get more money might be a smart move, provided the fees don’t outweigh the benefits. There are a few reasons borrowers can get more money if they refinance their existing reverse mortgage, including lowered interest rates, changes in principal limits and an uptick in your property value.
Do the math before you enter into a new contract. For instance, if your current reverse mortgage balance is $250,000 and the refinanced reverse mortgage will get you $200,000 in total, then you obviously want to avoid that situation.
Additionally, find out all the closing costs before refinancing your reverse mortgage, and be sure to get those fees in writing. Lenders are legally obligated to clearly outline exactly what fees they charge (see step 2).
Some common reverse mortgage refinancing costs include closing fees, survey costs, inspections, credit checks, certification fees, title insurance, flood certifications and more. You might be able to negotiate some or all of these fees with your lender. If you stand to gain $8,000 but the fees are $7,600 then it’s probably not worth your time to refinance.
2. Read the required disclosures
HUD’s regulations include an Anti-Churning Disclosure in accordance with Section 255 of the National Housing Act. The disclosure states that lenders must provide borrowers who want to refinance a HECM with the total cost of the new mortgage, including all fees, the new maximum mortgage limit and an estimate of the new funding that the borrower qualifies for.
The reason for this disclosure is to prevent “churning,” a predatory lending practice that includes refinancing existing loans in order to profit off of fees. These churned mortgages are usually not financially beneficial to the borrower.
To prevent this practice from occurring, the FHA requires that lenders provide two key pieces of information:
- The total cost of refinancing.
- The amount of the principal limit increase.
The principal limit increase is calculated by subtracting the existing principal limit from the new one. The difference is the amount of money the borrower stands to gain. If your existing limit is $160,000 and the new limit is $210,000, then you would get $50,000 from a refinance minus closing costs.
3. Know the loan limits
Higher loan limits could be an advantage for certain borrowers, especially if they got their loan years ago. Let’s say you took out a reverse mortgage loan 10 years ago and your property value has increased. You might be able to get a higher loan limit if you refinance.
Similarly, if the FHA raises loan limits, then you might be able to squeeze a few more dollars from your loan after refinancing it. For 2018, the FHA increased the loan limit for HECMs from $636,150 to $679,650.
4. Learn the borrower protections
Part of doing your due diligence in reviewing the pros and cons of refinancing a reverse mortgage is understanding the protections afforded to borrowers.
The National Reverse Mortgage Lenders Association, or NRMLA, a Washington-based trade group of reverse mortgage lenders, for example, 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.
5. Understand adding and removing borrowers
Refinancing a HECM can offer benefits other than cash.
HUD’s rules specifically allow refinancing to add or remove a borrower. That’s important because borrowers must be 62 years old, and some seniors get a loan while they’re married to, or before they marry, someone who’s not old enough to qualify as a borrower. Similarly, if you’re going through a divorce, you might want to refinance to remove your ex from the mortgage.
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.
For those adding a spouse, you might qualify for FHA streamline refinancing. (It’s possible, but complicated, to remove a borrower with this option.) This is specifically designed for existing FHA-insured mortgages where borrowers are not receiving cash back. Streamlining is a simpler, less expensive option because credit checks are not required and costs are minimal.
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