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Because home values have gone up so much over the past several years, you might be wondering if it’s possible to refinance a reverse mortgage. While a reverse mortgage refinance works the same way as a traditional refinance, it’s important to understand how the refinance process would work and whether or not it would make sense for your financial situation.
Key Takeaways
- Reverse mortgages allow homeowners 62 and older to access the equity they have in their homes without monthly payments.
- Reverse mortgages do not need to be paid back until the last borrower passes away or moves out, or the home is sold.
- When you refinance a reverse mortgage, you replace one mortgage with another.
Why Refinance a Reverse Mortgage?
There are several reasons why someone might want to consider refinancing a reverse mortgage. Let’s take a look at a few.
Access Additional Equity
Housing prices have increased substantially over the past five years. By refinancing your reverse mortgage, you’ll be able to take advantage of the rise in prices to access the additional equity in your home. This can help you continue to fund your retirement or pay for other financial expenses you might have.
Interest Rates Have Declined
If interest rates have declined since you took out your reverse mortgage, you may decide it makes sense to refinance. This would help reduce the finance charges you’re required to pay back in the future.
Home Equity Conversion Mortgage (HECM) Limits Have Increased
If the HECM limits have increased since you took out your reverse mortgage, you could refinance your loan and receive access to additional funds.
Switch to a Traditional Mortgage
If your financial situation has recently changed or your dependents don’t want to sell the home after you die, you might decide to refinance your reverse mortgage and move back into a traditional loan.
Switch From an Adjustable Rate Loan to a Fixed Rate Loan
Reverse mortgages can have a fixed or adjustable rate. If you have an adjustable-rate reverse mortgage and believe interest rates are rising, you might want to refinance into a fixed-rate loan.
Add a Spouse to Your Loan
If you pass away, your non-borrowing spouse may be required to repay the reverse mortgage. However, refinancing to add them to the loan can provide some protection. They would then have the choice to sell the home or hold onto it until their death.
How Refinancing a Reverse Mortgage Works
When you refinance a reverse mortgage, you’ll pay off your current mortgage with a new one. You can refinance with another reverse mortgage or a traditional mortgage. The requirements are going to differ slightly between the two.
Refinancing a Reverse Mortgage For Another Reverse Mortgage
If you choose to refinance into another reverse mortgage, your loan amount will be based on your age, the value of your home, and current interest rates. You’ll then be able to receive the funds either as a lump sum payment, a line of credit, or with monthly payments.
Refinance a Reverse Mortgage for a Traditional Mortgage
You could also decide to refinance your reverse mortgage into a traditional mortgage. When you do this, your loan amount will be based on your income, credit profile, and the current interest rate.
When you move from a reverse mortgage to a traditional mortgage, you’ll pay off the reverse mortgage balance and then begin making monthly mortgage payments again. If you’re hoping to still have access to equity to help cover your expenses, you’d want to choose a cash-out refinance.
Eligibility to Refinance a Reverse Mortgage
If you’re thinking about refinancing a reverse mortgage, there are some eligibility guidelines you must meet. These include:
- The home must be your primary residence: You must live in the house full-time. Reverse mortgages are not available on investment properties or second homes.
- You must be 62 or older: Reverse mortgages are only available to anyone 62 years and older.
- There needs to be equity in the home: You must have lived in the home for a period of time that has allowed you to build up a significant amount of equity in the home.
- Show stability with your finances: Lenders want to see stability with your finances, just like with any other loan. You might not have a monthly mortgage payment, but you will be responsible for property taxes, insurance, and maintenance. Lenders want to see that you can manage each of these before moving forward with a reverse mortgage.
- You can’t be behind on any federal debt: You must be current on all federal debt before you can use a reverse mortgage. This includes federal income taxes and student loan debt.
- No reverse mortgage refinancing in the past 18 months: You’re not allowed to refinance a reverse mortgage if you’ve done a reverse mortgage refinance in the past 18 months.
Reverse Mortgage Refinance Pros
- Access to additional funds when the home’s value increases
- Get better terms, potentially slowing the rate of loan balance growth
- Retain equity in the home by switching to a traditional mortgage
- Protect the home by adding a non-borrowing spouse
Reverse Mortgage Refinance Cons
- Monthly payments will resume if refinancing into a traditional mortgage
- You could incur substantial closing costs
- Diminished equity for heirs if you access more cash
- May only be worth it for those with at least 40-50% equity in their homes
Reverse Mortgage Refi Alternatives
Before you move forward with a reverse mortgage refinance, it’s also important to consider some of the alternatives available.
Modify Your Repayment Terms
If your goal is to switch between the five available adjustable-rate repayment plans, you can do this without refinancing your reverse mortgage. Instead, discuss the options with your mortgage service provider and they will handle everything for you. You’ll just need to fill out some paperwork and pay a small fee.
Sell Your Home and Pay It Off With Cash
If you no longer have a physical attachment to the home and don’t plan on leaving it to your dependents, you could sell the home and use the proceeds to pay off the reverse mortgage.
However, before you go this route, you’ll want to request a payoff quote from your servicer. This is going to help you understand how much you’ll owe. You can then compare that to the current value of your home to understand if this is the best move financially.
Make sure you also factor in the realtor commission you’ll need to pay when you sell as well as what you’ll need for a new place to live.
Get a Traditional Mortgage
If you’ve changed your mind and want to keep your home in the family after you die, you can refinance to a traditional mortgage. If having access to the equity in your home is important then you can use a cash-out refinance. This will allow you to pay off your reverse mortgage, use the equity for your retirement expenses and then pay back the loan over a 15- or 30-year period.
Get More Advice
The decision to refinance a reverse mortgage is a tricky one. That’s why meeting with a financial planner and mortgage lender is a good idea. Get started here.
