Can you refinance a reverse mortgage?
Yes, you can refinance a reverse mortgage, but it’s important to consider the benefits and potential risks of reverse mortgage refinancing before starting the process. A reverse mortgage allows homeowners age 62 or over to borrow money against the equity in their homes. The loan amount can pay off any existing balance on the original mortgage and turn a percentage of the equity into cash. A reverse mortgage is eligible for refinancing after 18 months.
You can refinance a reverse mortgage, but you must meet or comply with the following requirements to qualify:
- You must be 62 or older
- You must live in the home as your primary residence
- You must own the home or owe significantly less than the amount of the original mortgage — in other words, 50% or more equity is required
- You cannot be delinquent on federal debt
- You must have the ability to meet other financial obligations, including property taxes, insurance and home maintenance costs
Most lenders also impose a “seasoning” requirement, meaning the reverse mortgage must be 18 months or older.
How to refinance a reverse mortgage
Make sure the savings from refinancing outweigh the upfront costs.
Before refinancing a reverse mortgage, consider how the new loan will affect your financial situation. If you are hoping to take advantage of lower interest rates, consider if the long-term savings will be more than the upfront closing costs and fees you will pay on the new loan.
Overall, the process for refinancing a reverse mortgage is similar to obtaining an original reverse mortgage.
- Start by checking rates and running the numbers on how much you could save by refinancing. Subtract any closing costs and fees charged by the lender to determine your actual savings.
- Qualify for a new reverse mortgage by demonstrating you can meet financial obligations, such as loan insurance, homeowners insurance and other housing-related costs. If you plan to add your spouse, they must also meet eligibility requirements.
- Determine if the new reverse mortgage would meet the 5-5 rule, which means the increase in the principal amount must be equal to or more than five times the closing costs, and the loan proceeds must be equal to or more than 5% of the amount being refinanced. Lenders do not typically approve reverse mortgage refinances that don’t meet these criteria.
- Complete the application. Be prepared to provide financial information and documentation for your current reverse mortgage.
- Obtain any required appraisals, inspections or surveys on the property. Requirements depend on the lender.
- Choose how you will receive the funds. This could also depend on what options the lender has available.
- Sign closing documents and pay closing costs.
Benefits of refinancing a reverse mortgage
For some borrowers, the most compelling reasons to refinance a reverse mortgage are lowering interest rates or switching from a variable rate to a fixed rate. If you borrowed when rates were high and interest rates have gone down significantly, this might also make refinancing worth it. Carefully consider how much you or your heirs will save over time versus the closing costs and fees associated with the new reverse mortgage.
Another reason to refinance a reverse mortgage is if your home has appreciated in value, making you eligible for a higher loan limit. Since a reverse mortgage is not taxed, this could be a way to take advantage of increased equity.
Other borrowers might consider reverse mortgage refinancing if they need to add a spouse to the loan to ensure he or she can remain in the home if the borrower passes away or moves into a nursing home.
Risks of refinancing a reverse mortgage
The main risk is that the costs and fees of refinancing a reverse mortgage might outweigh the benefits of a lower interest rate. Take time to calculate how much interest you would save minus any fees a lender would charge to process your refinance. If interest rates haven’t dropped by more than 2%, it’s most likely not worth it.
If you’re refinancing a reverse mortgage to access more equity, it will cause the loan balance to grow faster, possibly overtaking the value of the home if the housing market falls. Though the law prevents the borrower or heirs from having to pay back the loan for more than what the home is worth, this can take a significant chunk out of any planned inheritances.
Reverse mortgage refinance alternatives
If you’re considering refinancing your reverse mortgage, make sure to consider other alternatives first. Depending on your financial situation, the value of your home and current interest rates, another option might better suit your needs.
Here's a list of reverse mortgage alternatives worth considering:
- Refinancing to a traditional mortgage
- Selling your home to recoup the remaining value
- Changing the terms of the loan payout to better fit your financial needs (if possible). Some loans offer various payout options, including lifetime monthly installments, limited-time monthly installments for a preset term, a line of credit or a combination of these options
- Completing a cash-out refinance big enough to cover your existing mortgage and your reverse mortgage
Should I refinance my reverse mortgage?
Adding a spouse to a reverse mortgage is probably the most compelling reason to refinance. If the sole borrower passes away or moves out of the home, reverse mortgage payouts cease and the loan balance could become due, potentially leaving the surviving spouse homeless. Refinancing also might be worth researching if interest rates have dropped significantly since you took out a reverse mortgage. However, the primary benefit would probably be for your heirs.
Either way, make sure to ask lenders for an upfront breakdown of the fees and the new interest rate you qualify for so you can compare how much you could save versus how much refinancing would cost.
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