Reverse-mortgage refinancing may be the right choice for your home.
Traditional home loans are refinanced practically every day. If property owners took out a mortgage loan years ago when interest rates were higher, they have the option of refinancing the loan, which essentially pays off the current loan and establishes a new mortgage.
The reasons for refinancing a loan are many. For the most part, people take advantage of refinancing for lower interest rates. However, it may also be used for shortening the loan term or converting the loan from adjustable to fixed-rate.
The same principle of refinancing can be applied to reverse mortgages. Like original mortgages, reverse mortgages come in many different forms, and even if you have an established reverse mortgage, you can always take advantage of better terms or rates.
If you have a reverse mortgage, it always helps to understand the potential benefits, as well as the drawbacks, of reverse-mortgage refinancing.
Refinancing a Reverse Mortgage
If you are interested in reverse-mortgage refinancing, it’s safe to assume you already know about reverse mortgages themselves. For this reason, we won’t dive too deeply into explaining this topic; we’ll instead focus this article on refinancing already-established reverse mortgages.
For more information on reverse mortgages, see these posts:
So what happens when you refinance? With a reverse mortgage, you are essentially receiving money in exchange for equity ownership in your home. The amount you receive and the equity you give will be based on many factors, including interest rates, the home’s value, and your established equity.
However, if certain factors have changed, such as the value of your home or the current interest rates, it may be possible to refinance your reverse mortgage and receive more cash from the bank for the same portion of equity that you give up.
When is A Reverse-Mortgage Refinance a Smart Choice?
One of the main reasons why someone would choose to refinance is because interest rates have gone down. A lower interest rate results in a higher calculation of the principal limit at the beginning of the reverse mortgage, meaning the borrower has access to more home equity through the life of the program. A lower interest rate will also decrease the amount of money that will be added to balance. If all that seems confusing, just know that low interest rates bring more money from a reverse mortgage.
The other reason, and perhaps a little easier to understand, is an increase in home value. Let’s say you agreed to a reverse mortgage ten years ago, when your home was valued at $1.5 million. Over the past decade, property prices rose and your home is now valued at $1.75 million; an increase of $250,000. The reverse mortgage that was established ten years ago is giving you payments based on a home worth $1.5 million, but if you refinance, you can receive payments based on a home worth $1.75. The result is larger payments coming into your pocket.
The U.S. Department of Housing and Urban Development has specific guidelines on reverse mortgages. There are specific limits to reverse mortgages that are established by this agency, but if limits have gone up, you may be able to refinance your reverse mortgage for better terms.
Because reverse mortgage loans are insured by the FHA, it may be possible to get a credit on your loan insurance when you refinance. This is another potential advantage of refinancing the reverse mortgage.
Qualifications for Refinancing your Reverse Mortgage
Just because you have a current reverse mortgage does not necessarily mean you automatically qualify for refinancing. To qualify, you must still have a large amount of equity in your home. The specific amount of required equity will change depending on the program, but if you have already given up much of your equity ownership to another reverse mortgage, it will be hard to find a lender who will take on your refinance.
You will also need to have additional cash proceeds for qualification. Again, the specific numbers will change, but many lenders recommend having five-times the fees you will be charged during refinancing. For example, if the closing costs will total $1,000, you should have at least $5,000 in proceeds.
There are exceptions that can be made to these qualifications. For example, if you are adding non-borrowing spouse protection to your loan, you may be able to qualify for refinancing.
What are the Downsides to Refinancing a Reverse Mortgage?
There are, of course, downsides to refinancing your reverse mortgage that you should consider before signing up for the program. Each time you sign up for a new reverse mortgage, there are fees and costs that are acquired. The upfront fees, which can include closing costs, insurance, and origination fees, can be pricey depending on the specific program. While most of these costs are usually financed out of the reverse mortgage itself, meaning there are no out-of-pocket costs, the fees will eat into the equity that you have in the home.
When you refinance the reverse mortgage, you may need to go through loan counseling all over again. This is more of a mild inconvenience than a significant downside, but it will cost roughly $100 to $150 to complete and take time from your schedule. However, this counseling helps prepare you for dealing with the details of a reverse mortgage; in many cases, re-taking the class could serve as an important refresher, and you’ll likely get up-to-date information on reverse mortgages.
Learn More About Reverse-Mortgage Refinancing
The team at San Diego Purchase Loans would love to help you learn more about reverse-mortgage refinancing. We’ll take a look at your current reverse mortgage and give you an honest assessment for improving your plan. If you could benefit from a new program, we’ll give you the right information so you can make a confident decision.
Contact us today and let us help you get the most from your home’s equity!
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I highly recommend Chad Baker. He does a phenomenal job and won’t trauma you or your clients. He has a whole team that works on the loans. And all the team members are great. He has a person that can translate for your clients that are Chinese. He is as good of a loan officer as you are an agent, and that is what you want when referring clients to a lender.
“We’re loving our new place and we’re very pleased with how smoothly everything went through closing. Thanks for keeping us up to date on the possibility of refinancing at a lower rate; we trust your judgement as far as waiting until the rate is around 5% lower before we refinance. We’re very interested in pursuing that if rates drop to that level. Thanks so much for all your help and personal attention!”