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Can you refinance a reverse mortgage?

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Refinancing is not just for traditional home loans – you can refinance a reverse mortgage, too. Refinancing a reverse mortgage is ideal for homeowners who want to trade their existing loan for one that has better rates or terms. It’s important to consider the benefits and potential risks of reverse mortgage refinancing before starting the process.


Key insights

  • Reverse mortgages are an option for homeowners 62 and older who want to tap into their home equity.
  • Refinancing a reverse mortgage can help lower the interest rate or convert the loan to a traditional loan.
  • You are still responsible for taxes, homeowners insurance and homeowner association (HOA) fees.

What is a reverse mortgage?

A reverse mortgage allows older homeowners to tap into the equity of their home without new monthly payments or selling their home. The loan is due back when you sell the home, move or pass away. While the title remains in your name, the reverse mortgage lender has a lien on the property.

Depending on the lender and the type of reverse mortgage, you can get the loan funds via a lump sum payment, monthly payments or a line of credit. The amount you can borrow is based on factors including your age, interest rates and the value of your home.

Reasons to refinance a reverse mortgage

Commonly, homeowners take out a reverse mortgage to supplement their retirement income. Refinancing a reverse mortgage can be done for a number of reasons, including:

  • Changing from an adjustable rate to a fixed rate
  • Changing how monthly payments are disbursed
  • Getting a better interest rate
  • Accessing more equity
  • Adding your spouse to the loan
  • Changing your loan type to a traditional mortgage
  • Changing the reverse mortgage type

How do I qualify for a reverse mortgage refinance?

You can refinance a reverse mortgage, but you must meet 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 outright or have a very low mortgage balance.
  • You cannot be delinquent on federal debt, such as income taxes or student loans.
  • You must have the ability to meet other financial obligations, including property taxes, insurance and home maintenance costs.

If you plan to add your spouse, they must also meet eligibility requirements. Most lenders also impose a “seasoning” requirement, meaning your existing reverse mortgage must be 18 months or older.

Steps to refinance a reverse mortgage

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.

1. Check your rates

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.

2. Know the 5-5 rule

Lenders typically only approve reverse mortgage refinances that follow the 5-5 rule.  This is when an 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.

3. Apply for the refinance

Be prepared to provide financial information and documentation for your current reverse mortgage. Some lenders require appraisals, inspections or surveys of the property.

4. Sign loan documents

Finally, you will choose how you want to receive your funds. Your options will be limited by what your lender offers. Once you choose, then you just need to sign closing documents and pay closing costs.

Pros and cons of refinancing a reverse mortgage

For some homeowners, the most compelling reason to refinance a reverse mortgage is getting a lower interest rate, but sometimes the costs and fees of refinancing outweigh that benefit. It is important to think through both the pros and cons of refinancing a reverse mortgage.

Pros

  • Can secure lower interest rate
  • Can tap into more equity
  • Can add a spouse to the loan

Cons

  • Costs and fees
  • Increases the debt amount
  • May be hard to qualify for

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    Reverse mortgage refinancing alternatives

    If you’re considering refinancing your reverse mortgage, make sure to consider alternatives first. Depending on your financial situation, the value of your home and current interest rates, another option might better suit your needs.

    A couple of reverse mortgage alternatives worth considering include:

    • Switch to a forward mortgage. Refinancing to a traditional mortgage will bring back your monthly payments, but you will no longer be losing home equity.
    • Sell your home. This step will repay the reverse mortgage and allow you to access any equity in cash.

    FAQ

    Can you transfer a reverse mortgage?

    You can’t transfer a reverse mortgage. The only way to add another person to your reverse mortgage is to add on a co-borrower through a refinance. Any co-borrower needs to meet the eligibility criteria – being 62 or older and not having federal debt delinquencies. Co-borrowers do not need to be married or related to you.

    Can you pay off a reverse mortgage?

    Typically, you repay a reverse mortgage when you sell the home. If you want to get out of a reverse mortgage agreement, then you can either pay off the balance to the lender or refinance to a conventional mortgage loan.

    How many times can you refinance a reverse mortgage?

    While there are no set rules to how many times you can refinance, there are limitations that make refinancing multiple times difficult. First, you need to wait 18 months after your reverse mortgage or refinance to be eligible. Second, you need to have enough equity to qualify.

    Bottom line: 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, potentially leaving the surviving nonborrowing spouse in a difficult situation. Refinancing also might be worth researching if interest rates have dropped significantly since you took out a reverse mortgage.

    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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