If you have an existing reverse mortgage, you might be considering refinancing. You may wish to switch from adjustable-rate to fixed-rate payments, recognize an increase in your home’s value, or make it easier to keep the property in your family. No matter the reason, refinancing your reverse mortgage is fairly simple. Here’s everything you need to know about reverse mortgages, how to refinance them, and the benefits and drawbacks of a refi reverse mortgage.
What Is a Reverse Mortgage?
A reverse mortgage is a type of home loan that allows you to use your home equity instead of making payments on a mortgage. With a reverse mortgage, the lender sends regular payments to you as the homeowner, rather than you making mortgage payments to the lender. The home loan will collect interest – however, your interest payments are deferred until you sell your home or pass away.
Reverse mortgages are available in several types: Home Equity Conversion Mortgages (HECMs), single-purpose, and proprietary reverse mortgages. Each type of reverse mortgage comes with specific eligibility requirements you must meet should you choose to refinance your reverse mortgage in the future.
When to Consider Refinancing a Reverse Mortgage
You can only apply for a reverse mortgage (or to refinance a reverse mortgage) if you are 62 years of age or older. That said, you might consider refinancing when:
- The value of your home increases substantially.
- Your initial loan was less than the HECM lending limit and is equal to or more than the U.S. Department of Housing and Urban Development (HUD) lending limit.
- You need to add a younger spouse who wasn’t 62 years of age at the time of your initial loan.
- You want to benefit from lower interest rates or margins.
- You’re considering refinancing into a larger reverse mortgage plan.
- Your heirs want to keep the property.
Essentially, your reverse mortgage becomes due in full upon your death and your heirs become responsible for paying it, whether or not they intend to live in the home. Unless they have the cash on hand to repay the lender, they’ll have to sell the home.
If you wish to keep the home in the family, you may wish to finance out of your reverse mortgage with an assumable financial product – meaning, a contract that can be inherited. A conventional mortgage, for an example, is assumable – it can be passed on along with the home.
How Does a Refi Reverse Mortgage Work?
To refinance any type of reverse mortgage, you’ll need to meet the specific eligibility requirements of your lender. For HECM, FHA-approved, and government-backed reverse mortgages, the process for refinancing includes the following steps:
1. Fulfill the Initial Requirements
Before you can refinance a HECM or other type of government-backed or FHA-approved reverse mortgage, you’ll need to meet the initial eligibility requirements. First, you need to be 62 or older, own your property outright or have the equity to cover the existing loan, occupy the property as your primary residence, and participate in a reverse mortgage counseling session with a HUD-approved counselor.
2. Meet the Mortgage Insurance Premium (MIP) Requirement
This is a HUD guideline that limits the initial MIP of a HECM refinance to 3% of the increase in your maximum claim amount. This means that if your new maximum claim amount is $350,000 and your initial maximum claim amount on your original HECM was $200,000, then the 3% limit results in $4,500. So if you initially paid an MIP of $3,000, you would only pay $1,500 in MIP to refinance your reverse mortgage.
3. Maintain an Anti-Churning Disclosure
The lender you work with for your refinance must provide you with an anti-churning disclosure. Anti-churning refers to the practice of mitigating deceptive lending practices, such as a lender encouraging a borrower to refinance reverse mortgages back-to-back. Your lender must provide this document, which outlines the estimates for the total cost of refinancing and the increase in your principal limit.
4. Choose to Waive the Reverse Mortgage Counseling
If you meet the eligibility requirements to waive your participation in the counseling session, you can choose to do so. The eligibility requirements you must meet to waive the reverse mortgage counseling include having initiated your original HECM before a specific date, receiving the anti-churning disclosure from your lender, having your new principal limit exceed the total cost of your refinance, and having initiated your refinance within five years of the closing on your original HECM.
5. Determine the Best Method for Refinancing
One option for refinancing your reverse mortgage is with a Home Equity Investment (HEI) from Point. Like the reverse mortgage, there are no monthly payments with an HEI. However, you maintain full control over your home. Point’s HEI is assumable, and your heirs can inherit the agreement when you pass.
Another option is to refinance into a conventional mortgage if you’re no longer worried about the monthly payments.
Advantages of Refinancing Your Reverse Mortgage
If you’re considering a refi reverse mortgage, here are several advantages:
- Increases cash: Refinancing a reverse mortgage allows you to rely on your home’s equity rather than a limited retirement income to assist in making monthly payments or paying off existing regular mortgages.
- Lower interest: There may be considerably lower interest costs compared to refinancing a traditional mortgage.
- Non-taxable funds: The funds you receive from refinancing your reverse mortgage are not taxable as they are considered loan proceeds and not income.
Disadvantages of Refinancing Your Reverse Mortgage
There are also drawbacks to a reverse mortgage refinance, including:
- Your property may not qualify. If the home you want a refi reverse mortgage for isn’t your primary residence, it may not qualify for refinancing.
- There are costs to refinancing. You’ll be responsible for any fees for refinancing, similar to a traditional mortgage.
- You may be responsible for repaying the loan. If you fail to pay your insurance or property taxes or maintain the property, your loan may become due.
If you’re interested in refinancing your reverse mortgage but don’t want the monthly payments, consider a home equity investment. An HEI lets you maintain control of your home. To learn more about this option, get in touch with one of Point’s team members. Find out how much you can get today.Tags: Reverse Mortgage