Dear Dr. Don,
We have a reverse mortgage on our home, which leaves approximately $100,000 in equity. How can we access that equity without selling our home? What type of lender will make a second mortgage or home equity line of credit (HELOC) on top of a reverse mortgage?
— Diane Doubledip
When you get a reverse mortgage, you borrow against the equity in your home but you don’t have to make loan payments. A reverse mortgage is like an interest-only mortgage where the interest expense is added to the loan balance instead of the homeowner making monthly interest payments. The combination of no monthly loan payments and an increasing loan balance limits the amount of money you can borrow against the equity you have in your home.
No lender is going to want to lend you money against the equity in your home for a HELOC or second mortgage when you have a reverse mortgage in place. The reverse mortgage lender has a claim on the equity in your home. It’s not yours to borrow against until you pay off the reverse mortgage.
It’s possible that you left an extra $100,000 of equity on the table when you got the reverse mortgage, especially if you had more equity available than what the reverse mortgage allowed in the loan limits.
The market for private lenders issuing reverse mortgages has all but dried up given the popularity of the Federal Housing Administration’s version of the reverse mortgage — the Home Equity Conversion Mortgage, or HECM. For a HECM, the amount that you may borrow is derived from the lower of the appraised value, sales price or the current FHA HECM mortgage limit of $625,500.
Another option is refinancing. Refinancing may allow you to tap at least some of that leftover equity, especially if the FHA mortgage limit is higher than the limit in place when you got your original loan.
In the case of refinancing, the issue becomes paying the upfront costs associated with refinancing a reverse mortgage to tap that additional equity. That, along with the other considerations when refinancing such as the interest rate on the loan and how long you plan to be in the home, will influence the decision to refinance.
Refinancing to tap any additional equity in your home plus the possibility of reducing the effective interest rate can make sense. You’ll have to decide if the benefits associated with refinancing outweigh the costs, given the time you expect to remain in the home.
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