There are many instances when borrowers consider refinancing their reverse mortgage, but it really would not make sense for them.
HUD and investors have guidelines in place that prohibit lenders from refinancing reverse mortgages when the loans do not meet certain targets for borrowers and when they are too recently closed.
There are some instances that we will discuss, when a refinance does make sense, but even then, only if it is needed by the borrower(s) and makes sense for their circumstances.
Some homeowners will find that they meet some of the conditions that are listed but don’t need additional funds and, in those cases, a refinance is not warranted because it is not needed for that borrower’s circumstances even though they could qualify for the additional funds.
Here are some of the specific circumstances that help attribute to making a refinance viable and makes sound financial sense for borrowers:
1.Your home value has increased considerably.
2. You originally obtained your loan when the lending limit was less than the 2019 HECM limit of $726,525 and your value is at or higher than the HUD limit, especially the limit that was in effect at the time you closed your loan.
3. You are adding a younger spouse now who was not age 62 at the time you did the loan and they were also not an eligible non-borrowing spouse to protect them from having to sell the home upon your death.
4. To benefit from a lower interest rate or margin – This is a tough one and we will go into it further, most rate refinances alone are not beneficial.
5. Refinance into a larger proprietary or jumbo reverse mortgage plans.
Increase in Lending Limits or Home Value
If your home value has increased considerably, there may be an opportunity to refinance to obtain more money.
Small increases will not typically bring a large enough net gain to borrowers to make a refinance worthwhile or viable as we will discuss later in refinance qualifications.
Many borrowers have homes that have values higher than the HUD limit at the time their loans were closed. Prior to 2008, the HUD limit varied by county and the highest limit was $362,790. In 2008, the limit became a national limit, set at $417,000.
In 2009, the limit was raised to $625,500 where it stayed for several years before it began to increase in 2015 as housing prices rose.
Therefore, borrowers who closed their loans before today’s current limit of $726,525 may have the opportunity to receive more cash benefits, especially if they had a higher valued home on which they closed a loan back before 2009.
Many couples removed a younger spouse from title prior to 2014 to close a reverse mortgage since this individual was not yet 62 and the younger borrower is protected if something should happen to the older spouse.
Whether that borrower is 62 yet or not, the couple can do a refinance if they qualify with the younger spouse now as a co-borrower or an eligible non-borrowing spouse (if they are still under 62) under the current HUD program parameters and these borrowers can also stay in the home for life without having to make a mortgage payment – even if something were to happen to the older spouse.
Borrowers looking to refinance just for a lower rate may be able to do so but they may also be disappointed. You must meet the refinance qualifications we will discuss later and so even if you could get a better rate, if there are no additional benefits (cash or payments) available to you, HUD would not allow that refinance.
The last point is that with the reintroduction of the jumbo or proprietary reverse mortgage programs offering loans to higher loan amounts, many borrowers who were forced to accept a lower loan amount on the HUD program because it was the only program available for many years are now looking at the jumbo products for higher property values as a way to free up equity for other purposes.
You must still have a significant equity position in your home to do a refinance of a reverse mortgage with either the HUD or the private programs.
For HUD, you must pass the “5-times benefit rule” e.g., if the new closing costs equal $2,000 you must benefit from at least $10,000 in additional cash proceeds. There is no “5 times” rule on the refinance when it is being refinanced from a HUD loan to a proprietary program, but it still has to make sense for you, or the lender will not do the loan either.
You must receive at least 15% of the new principal limit in additional reverse mortgage proceeds for the HUD HECM to HECM refinance.
Preferably your interest rate or margin should be improved, but in a rising interest rate market, this is not necessary.
Exceptions may be made, e.g., adding a non-borrowing spouse protection to your loan.
Five Times Benefit Rule
The five times benefit rule means that you have to take all the costs incurred to do the new loan and multiply those by 5 and if the borrower is not receiving at least 5 times or more this much money with the new loan over the old loan, then the borrower must attend counseling again.
It doesn’t mean the borrower can’t get the loan, if it still makes sense, they just must go through the counseling again to make sure they again understand the program. A good way to illustrate this is that if all the costs for the new loan would total $10,000, then the borrower would have to net $50,000 more on the new loan (there is a formula that the lenders have to follow per HUD guidelines which also accounts for servicing set-asides but for simplicity sake, this is a simplification of the policy).
And remember, if counseling is required, you must have received the counseling before any services are required and some states require counseling in all instances anyway. The other exception is if you are going from a HUD loan to a private loan, you will be required to be counseled again to be sure you understand the new program.
In my borrower’s case, she wound up netting a significantly higher benefit and did not have to attend counseling again. If she lived in a state like California, she would have had to be counseled anyway.
The costs you must incur are all the same costs as when you got your first reverse mortgage (title, escrow, appraisal, origination fee, etc.) except for one…the mortgage insurance.
The mortgage insurance from the loan being paid off is transferred to the new loan so only the difference from the old level to the new level is what the borrower must pay on a refinance. The private programs have no mortgage insurance so there is no up-front cost and no monthly renewal costs for mortgage insurance with these programs.
For example, if the old mortgage insurance on a HUD HECM was based on a lending limit of $200,000 and the new limit was $225,000, then the mortgage insurance would be 2% of the difference between the two, or $500 instead of the $4511.11 it would normally cost. The borrower already paid the other $4,011.11 on the first loan and HUD does not charge it a second time for the new refinance.
Obtaining a Refinance Quote
If there has been a large positive value change in your area or a life change with the original borrowers, it may make sense to investigate a refinance. Give us a call and let us look at your circumstances but if it doesn’t make sense for you, we will tell you right up front.
There is no reason to incur costs unless you, the borrower, really are going to benefit by doing so. Just as with deciding if the loan was right for you in the first place, a refinance is all about you and your needs. Don’t do it because you get 30 pieces of mail a month offering it to you or because someone calls you and tells you they think you should.
The experts at All Reverse Mortgage® are here to answer your questions! If you have a question about refinancing your reverse mortgage give us a call Toll Free (800) 565-1722 or try our free refinance calculator.
Also See: Ask ARLO™ Refinance Q&A