Reverse Mortgage Refinancing

Refinancing a reverse mortgage is a lot like refinancing a conventional one—you exchange your current loan for a new one that’s better suited to your situation. Perhaps you can get a lower interest rate or access more equity, depending on the terms of refinancing.

Qualifying for a reverse mortgage refinance requires meeting some specific criteria. The good news is that you’ve already qualified for a reverse mortgage before, and refinancing qualifications may be similar or identical, depending on when you took out your original loan. Here’s a recap below.

For HECMs, borrowers must:

• Be age 62 or older
• Use the home for their primary residence
• Own the home outright, or have paid off a substantial amount of the original mortgage
• Not be delinquent on a federal debt
• Be able to meet financial obligations such as property taxes, homeowners insurance and home maintenance, including homeowners association fees

Reverse mortgage lenders may also look at earnings, assets, living expenses, and credit scores to make sure the borrower will be able to meet their obligations. Plus, every borrower has to meet with a HUD-approved counselor to ensure they fully understand their options and obligations.

There are also FHA requirements for the property to qualify. For example, it must be a single-unit home with the owner living in it, have no health or safety hazards, and the owner must carry flood insurance if the property is in a high-risk area.

If you’re in a position to take advantage of one of the following benefits, a reverse mortgage refinance may make sense for you:

Get a better rate. Perhaps it’s been many years since you closed on your reverse mortgage, and the rate difference is enough to make it worthwhile to pay the upfront costs to get the benefits of a lower rate.

Gain more cost certainty. Recent events have made it difficult to predict which way the economy may go. If you have an adjustable-rate reverse mortgage, it might make sense to switch to a fixed rate, so there are no surprises in the future.

Get more equity. Maybe your home’s value has increased significantly, and there’s additional equity you can tap into. Refinancing can increase the amount of money you’re eligible to receive from the loan.

Protect your spouse. Adding your spouse to the loan can provide some financial benefits and something you can’t buy: peace of mind. Maybe your spouse wasn’t old enough to qualify (62+) when you closed on your reverse mortgage, and therefore isn’t on the original loan. Adding them now allows them to stay in the home (and continue to get the proceeds) if you pass away first, or if you move to a nursing home and your spouse doesn’t. All they would have to do is continue to pay property taxes, homeowners insurance, and maintenance.

Interest. Like any loan, the refinanced reverse mortgage has to be paid back to the lender eventually, and interest accrues on the loan. That’s why it’s so important to consider current interest rates before you make a decision.

Weigh the benefit of saving on interest versus paying for the new loan. Rising interest rates can counteract the benefits of refinancing. In general, the commonly used “2% rule” can apply to reverse mortgage refinances: to make it worthwhile to pay the upfront costs of the refi, the interest rate of the new loan should be 2% less than the original.

More to pay off later. Simply put, if you refinance to access more of your home equity, you’ll have a larger loan balance to repay at the end. Reverse mortgages typically must be paid off when the last surviving borrower dies or moves out of the home. It also comes due if taxes or insurance are unpaid, or if necessary repairs aren’t made.

The good news is that like your original reverse mortgage, the new loan also has “non-recourse” protection. This means that if the loan balance grows larger than your home value, and the home is sold to repay the loan, neither you nor your heirs will have to pay more than the home is worth. Insurance will cover the difference, as long as the home sells for at least 95 percent of the appraised value.

Loan fees. Refinancing a reverse mortgage usually means paying closing costs and other fees, which can include origination, appraisal, and title insurance fees, mortgage insurance premiums and more. These fees can add up, so make sure that the benefits you get from refinancing add up to significantly more over time.

Don’t want to refinance? You may be able to modify your current reverse mortgage. For example, you can choose to adjust how you receive the proceeds. You can choose monthly payments for the rest of your life, monthly payments for a fixed period of time, open a line of credit*, or any combination of these. It’s important to remember that this would not, however, change the interest rate or the total amount of equity you can draw out. To do those things, you’d need to refinance.

*Line of credit option is only available for adjustable rate HECM products.

A reverse mortgage refinancing decision requires adding up the numbers, and making sure they come out significantly in your favor. But it also depends on what your retirement goals are: maybe you want to pay less interest. Have more retirement funds to pay living expenses or debts. Or make sure your spouse is on the loan, so they can remain in the house and continue to receive the proceeds if something happens to you. If refinancing can help you meet these goals, it may be the opportunity you’ve been waiting for.