Blog content updated 9/10/2021
Yes, you can refinance a reverse mortgage just like a conventional forward mortgage—but there are some distinctions that you and the lender should consider before moving forward with refinancing. Let’s take a closer look.
Why a reverse mortgage refinance might make sense.
With today’s historically low interest rates, refinancing is a popular option for many types of loans, and reverse mortgages are no exception—in fact, according to Reverse Mortgage Daily, it’s estimated that refis may represent up to 40% of the industry’s volume.
Especially if it’s been many years since you closed on your reverse mortgage, the lower interest rate or margin (the portion of the initial interest rate charged by the lender) may be enough to make it worth paying the upfront costs. Beyond that, here are some other reasons you might consider a reverse mortgage refinance:
- Your home’s value has grown. – If so, there may be additional equity you can tap into, and refinancing can increase the amount of money you’re eligible to receive from the loan.
- There’s a higher lending limit. – The new 2021 HECM limit has increased to $822,375, which may mean you’d be eligible to access more cash by refinancing. If your home is worth significantly more than the limit, you may qualify for a larger proprietary (also known as Jumbo) reverse mortgage.
- You want to protect your spouse. – If your spouse wasn’t old enough to qualify as a borrower (age 62 or older) when you closed on your reverse mortgage, they’re not on the original loan. By refinancing and adding them to the loan, it ensures that they can remain in the home—and continue to get loan proceeds—if you pass away first, or move to a nursing home and your spouse doesn’t. This can help provide something money can’t buy: peace of mind. All they would have to do is continue to pay property taxes, homeowners insurance, and maintenance.
- You could gain more cost certainty. – Recent events have made predicting economic trends nearly impossible. If you currently have an adjustable-rate reverse mortgage, it might make sense to switch to a fixed rate, so there are no surprises in the future.
Things to keep in mind with a reverse mortgage refinance.
As with any type of loan, there are upfront costs to consider along with the benefits. The question is whether you can afford the upfront costs, and if the benefits significantly outweigh those costs. So how can you decide?
The National Reverse Mortgage Lenders Association (NRMLA) has set forth some ethical standards, called The 5-5 Rule, to help lenders determine if refinancing is in the borrower’s best interest. This rule states that, for a reverse mortgage refinance:
- The increase in the principal amount must be equal to or more than five times the loan closing costs.
- Loan proceeds must be equal to or more than 5% of the amount being refinanced.
Other factors include:
- How much are refinancing closing costs? – In general, a reverse mortgage refinance costs less than the original loan, since you’ve already paid into the mortgage insurance premium (MIP). If your home’s value is higher than the old appraisal, you’ll just have to pay the difference in MIP, plus other typical closing costs such as appraisal, title, notary, and recording fees.
- Interest: how much of a rate drop will make it worthwhile? – The old rule of thumb with conventional mortgages was that your rate needed to be 1% to 2% lower. But in the recent low-interest-rate environment, even a 0.5% drop would make up a larger percentage of your original rate. Consult with a financial expert to help you determine if refinancing offers you enough of an interest-rate benefit.
- What’s the impact of a larger loan balance? – While refinancing to access more home equity can increase your cash flow to help cover retirement expenses, it does mean a larger loan balance to pay off eventually. Typically with a reverse mortgage, this would be covered by the sale of the home when the last borrower leaves, and any leftover money would go to your heirs.
What’s the bottom line?
Sometimes reverse mortgage needs change and, in some cases, refinancing may be a good option—however, there should be a clear and defined benefit to justify refinancing. If you’re considering refinancing your reverse mortgage, consider these factors and give us a call. We’re committed to offering you the best guidance, and doing what’s right for you and your situation.
Questions? At Longbridge Financial, we’re here to help. To learn more, call (855) 523-4326 or fill out the form to get your free information kit.
